Auto Mechanics and Determining Your Product’s True Cost
I love my auto mechanic.
I feel like a need to say that, so he’ll keep repairs my cars.
Once consumers trust their auto repair shop, they may do business for years- I’ve used my repair shop for over a decade. It’s a great repeat business model- but the situation has changed in the summer of 2023.
Consider this quote from the Wall Street Journal:
“Across the U.S., a shortage of car parts in the past few years has collided with a continuing dearth of service technicians. The result: more frustrated customers, who are waiting longer to get their cars back, and paying more for service.
The backlog risks becoming a drag on the U.S. economy as higher repair costs prompt consumers to cut back spending elsewhere, or simply not having a working car curtails their mobility and productivity. A swath of service industries are facing labor shortages, from home construction to restaurants, appliance repair to trucking.”
This creates an accounting issue for the auto mechanic.
Higher costs for parts, and increased labor costs.
In the rush to meet customer demand, the owner may not know the true cost to provide the service- or whether a particular repair is profitable.
Let’s review those accounting issues.
How do I price the product?
Product pricing may be the number one mistake in business.
The price of your product must allow you to recover every cost you incur in your business. Said another way, the only way you can cover all your costs is by charging a customer.
If you don’t pass along all costs to customers, you’re losing money.
The shop has to price car repairs based on higher costs for labor and for parts. That price should also include overhead costs.
What are overhead costs?
Overhead costs are the most difficult costs to assign to a product, and business owners frequently have difficulty analyzing these costs. Overhead, or indirect costs cannot be directly traced to a product or service. Insurance premiums and utility costs are two good examples.
On the other hand, direct costs can be easily traced to a product or service. If you manufacture baseball gloves, for example, you can compute the amount of leather material you use in each glove, and the amount of labor cost is takes to run machines. As a result, material and labor costs are frequently classified as direct costs.
So, how to you assign overhead costs?
Using an activity level.
Allocating overhead costs?
The logic here is that a business incurs costs based on activities, such as the number of labor hours worked, total miles driven, or total units produced. If your company didn’t produce or sell anything during a particular month, many costs would not be incurred.
Your next step is to decide on an activity level that causes you to incur each overhead costs. In some cases, the connection is obvious. You can allocate mileage costs based on the number of miles driven to and from a particular customer’s location, for example.
Other connections between costs and activity level are harder to determine. A business might allocate utility costs for office buildings based on the square footage used by a particular division or department.
“Home office” salaries- those for accounting, legal, and other areas that support production and sales can be allocated based on the percentage of time that each department spends on a specific service, product, or product line. If you produce a product that creates the risk of product liability, for example, that product gets a higher legal cost allocation.
Product costing is an art, not an exact science. Use these tips to fully cost each product or service you sell, and to generate a reasonable profit.