Understand Cost Accounting

June 1, 2013
Understanding—and then utilizing—important cost accounting functions of shop management software is crucial for profitability

Brett Bailey calls it “borderline micromanaging,” but it’s a good thing, he insists.

“For every job, we track our costs down to every last penny that goes into it,” says Bailey, 35, who owns and operates five CARSTAR locations in the Kansas City area. “We’re looking at every repair order and every cost center every day in each of our stores.”

This is the way Bailey was taught by his father, who owned the shops before him, and it’s one of the main reasons his $15 million-a-year operation sees gross profit margins above 43 percent on a daily basis.
“I can’t imagine how you could run a successful, profitable business without focusing heavily on your costs and cost accounting,” he says.

Simply put: You can’t, says Scott Simmons, a national business process consultant with Summit Software Solutions.

“We have to be good business people to survive in today’s industry, because our margins, our profitability, our nonproduction-based labor, our admin costs, are all so high because of the demands placed on us,” he says. “We have to be profitable, and we have to understand our profitability, if we want to stay in business.”

This is where the concepts of cost accounting come into play, and it’s where the use of your shop’s management software could mean the difference between success and failure. Shop management systems are a powerful tool for tracking and understanding cost, and there are several key software functions that need to become a focal point of your business’s daily practices.

The Concept

The first thing Simmons does when consulting with a shop is to analyze their accounting information. On a recent visit to a collision repair facility, the shop operator informed Simmons of the business’s problems with their margins on parts. So, Simmons took a look at the shop’s data—and found nothing remotely useful.

“All of their parts were classified as one type in their accounting system,” he says. “It could’ve been new, used, remanufactured, OE, aftermarket—whatever it was, if it was a part, it went into parts income and all the parts were paid for out of parts sales. How can you find some understanding from what you’re doing?

“You don’t know how important this information is until you finally need to use it. If we don’t break down our cost centers and start identifying paint liquids from paint alloys, new parts from used parts, we can’t identify any information from it. If you don’t have facts, you’re just acting on a gut feeling.”

And that’s what cost accounting is all about: taking the accounting information from individual cost centers—analyzing cost, margins and profitability—and applying that data to make business decisions.

Everything that leads to failure and success in a shop is evident through the business’s financial reports, says Elainna Sachire, president of Square One System Inc., which operates 20 Groups for more than 240 shops nationwide. But those reports need to be correctly and accurately compiled and presented.

It’s not a simple task. Breaking down all cost information by hand, for each and every transaction, on each and every job, is beyond time-consuming.

This is where you need to let your technology help you. Sachire says that nearly every shop management program you could install at your facility will have cost accounting tools. However, to ensure the software works for your business, you need to take a hard look at its functionality.

The Focal Points

Sachire, Bailey and Simmons outlined several key areas to focus on in your management system.

1. General Accounting Ability.

Use the system to break down each cost aspect into its correct, individual cost center—parts types, labor costs, sublets, etc. It needs to track that information on each job. That means you and your staff need to accurately and consistently enter those numbers in the correct areas, Sachire says.

2. Real-time updating.

All the information being recorded needs to be updated live, and made available, when they need it, to anyone with access to the system. Sachire says that all employees need to be on the same page with updating the information consistently and accurately. “You can’t have one estimator include every detail every time at the beginning, then have another waiting until later to add in certain things,” she says. “That makes the job-costing information inaccurate.”

3. Reporting.

Most systems provide some level of reporting and analysis, and it’s critical to check and understand these reports. Bailey has his shop’s system (ABS Enterprise) give reports on each job in each shop, every single day. From manually inputting benchmarks into the system, Bailey has it set up to red flag any job that falls under his 43.5 percent gross profit margin goals. These reports are automatically sent to him, and to his managers and estimators.

4. Payroll and employee performance.

Payroll is a large aspect of cost in every shop, Simmons says. And whether your employees are paid on a flat-rate, commission, salary or hourly rate, Simmons says you should be closely watching your system’s tracking of the cost per job for each employee and how it demonstrates their productivity and efficiency (i.e. your return on that cost).

5. Consistency between estimate, customer receipt and accounting ledger.

This is something that comes up often when dealing with insurance companies. As Simmons explains, “Imagine the estimate you get from the insurance company says to use an aftermarket bumper, but you go to your local Honda dealer and they offer to price match their OE bumper for the job. Those are two different cost centers—aftermarket and OE parts. If you don’t have the ability to change it in your management system, then the information is going to be inaccurate in your accounting and on your customer’s receipt. These all need to be reported correctly. It’s something I see every day, and one of the biggest problems I see.”

6. Scrubbers.

Many insurance companies have requirements for how costs need to be classified, and they might not mesh with those of your shop. A scrubber is a tool in your management system that can automatically change these categories for your accounting. For instance, an insurer might require that hazardous waste be classified as a sublet for their purposes, but those are two separate categories for your shop, Simmons explains. The scrubber automatically shifts the cost to the right area. (For more on estimate scrubbing, see FenderBender’s September 2012 story, “Getting it Right the First Time,” at bit.ly/FBscrubbing)

Understanding is Crucial

As with learning how to use any tool or piece of equipment in a shop, thorough training is important for working with cost accounting software. There will always be tutorials and online manuals for the basic “push-button training,” Simmons says, but when it comes to accurately tracking and understanding cost, he suggests taking it a step further.

Everything in a shop ties into cost and profitability. Sales generate income, purchasing parts generates cost, as does the work technicians perform. Anyone who handles the management system needs to know what the shop’s cost centers are, how they affect accounting, and the importance of ensuring the accuracy.

“You’re looking at real-time, live data, and you need to know what to do with it,” Simmons says. “And that information needs to be dead-on correct. We don’t have the time to go back and fix things later. The industry has changed too much. Things have to be done right the first time, and we need to benefit from that.”