Shop-supply costs can eat up profits.
If the majority of shop supplies that are used could be converted into parts inventory and sold on repair orders, the end result could be a substantial increase in profits for the service and parts departments.
Converting shop supplies into inventory and selling them on repair orders may not be as difficult as many fixed-operations managers believe.
In the past, shop supplies were normally charged on the repair order as a percentage of labor. The percentage charged would help to offset the shop supplies expense account.
In today's world of consumer protection, many states no longer allow the dealership to charge a flat or percentage fee for shop supplies. In many states, any charges on a repair order must be itemized.
Since tracking every nut, bolt and screw can be an inventory nightmare, fixed operations managers tend to buy shop-supply items and simply charge it to the shop-supply expense account.
Parts managers and service managers just chalk it up to the cost of doing business. Technicians are often allowed to take shop supplies with no oversight. Why not put a few controls into place and start itemizing shop supplies on repair orders?
Itemize Without Inventory Control
The basic concept to itemizing shop supplies without inventory control is to set up a separate general ledger (GL) sales account and a cost of sales account for shop supplies.
The reciprocal account for the cost of sales account is an existing parts inventory GL account. Once these GL accounts are set up, the parts department needs to set up a specific parts source for shop supplies. Tie this source into the newly created GL account for shop supply sales.
As the shop supplies are handed out, the parts department charges each individual item on the repair order. When the supplies are charged out, the parts person uses the newly created source.
This allows for easy tracking of shop sales either by the general ledger or by the source code in the parts department. Ideally shop supplies should be stored in the parts department where they can be controlled and easily charged out to repairs orders as they are handed out.
Parts Pricing Tapes
Most of the major shop-supply hardware vendors have price tapes for all the major dealer management systems. When a shop supply item is charged to a repair order, the counter person bills the item to the repair using the vendor's part number and newly created source.
When the item is charged out, do not add the item to the system but allow the DMS to price the item from the price tape.
Month End Entries
The actual amount that's deducted from the parts inventory during the month needs to be reversed. The same dollar amount also needs to be credited back to shop expense. The amount posted to the newly created cost of sale GL account is used for the adjustment at the end of the month.
The journal entry is actually quite simple, a debit (increase) to the parts inventory GL account and a credit (decrease) to the shop supply GL account.
Step-by-Step Summary
- Move shop supplies to a controlled environment.
- Set up specific general ledger sales and cost of sales accounts.
- Set up a specific parts source tied to the specific GL sales accounts.
- Procure and install the shop supply vendor's price tape.
- Create pricing structures for shop supply parts source (cost plus?).
- Start charging out shop supplies to repair orders using the specific parts source.
- Make the month end general journal entry to increase parts inventory and reduce shop supplies expense.
Since itemized sales of shop supplies are converted to inventory when they're sold and reversed at the end of the month, there's no need to make changes to the current shop-supplies expense account.
There's also no need to take a physical inventory of shop supplies. When shop supplies are purchased, they can continue to be posted to the expense GL account.
The amount of incremental profits largely depends on the commitment of the parts and service departments, as well as the amount of markup when the items are sold.
If a 50% gross profit margins used (cost + 100%) on the shop supplies when they're sold, the actual profit realized would be double the gross profit because of the expense offset.
James Clausen has more than 25-years experience in fixed-operation management at dealerships.
