October 30, 2016 admin

Service Labor—Internal

Sales and Cost of Sales

SERVICE LABOR—INTERNAL ACCOUNT
SALES  5730/5731/5734/5735
COST OF SALES  6730/6731/6734/6735

ACCOUNT EXPLANATION

Sales: Internal selling price of repair labor performed in the service department and sold to other departments on completed repair orders, including new vehicle preparation, installation of accessories, used vehicle reconditioning, and maintenance of company vehicles.

Cost of Sales: Cost of above labor.

NOTE: Dealers with competitive franchises (Non FoMoCo) separate labor and report FoMoCo (franchise) labor in Account 5730/6730 and Non FoMoCo (other franchises) in Account 5731/6731.

*Refer to Chart of Accounts for current applicable Sales/Cost of Sales account numbers.
TRANSACTIONS
  Jrnl. Dr. Cr.
  Preparation of new car for delivery to customer I
    Pre-Delivery—New 7030
      Sales—Service Labor Franchise/Other—Internal (at internal rate) 5730, 5731
      Sales—Service Labor Quick Lane—Internal (at internal rate) 5735
      Sales—Service Labor Quick Lane Tires—Internal (at internal rate) 5734
    Cost of Sales—Service Labor Franchise/Other—Internal (at cost) 6730, 6731
    Cost of Sales—Service Labor Quick Lane—Internal (at internal rate) 6735
    Cost of Sales—Service Labor Quick Lane Tires—Internal (at internal rate) 6734
      Inventory—Labor in Process 1440
             
  Reconditioning work on used car for lot display I
    Inventory—Used Cars Franchise/Other 1350, 1330
      Sales—Service Labor Franchise/Other—Internal (at internal rate) 5730, 5731
      Sales—Service Labor Quick Lane—Internal (at internal rate) 5735
      Sales—Service Labor Quick Lane Tires—Internal (at internal rate) 5734
    Cost of Sales—Service Labor Franchise/Other—Internal (at cost)   6730, 6731  
    Cost of Sales—Service Labor Quick Lane—Internal (at internal rate)   6735  
    Cost of Sales—Service Labor Quick Lane Tires—Internal (at internal rate)   6734  
      Inventory—Labor in Process     1440
             
  Repair labor on company vehicle I
    Equipment & Vehicle Maintenance—General 8780
    Equipment & Vehicle Maintenance—General—Quick Lane 7980
      Sales—Service Labor Franchise/Other—Internal (at internal rate) 5730, 5731
      Sales—Service Labor Quick Lane—Internal (at internal rate) 5735
      Sales—Service Labor Quick Lane Tires—Internal (at internal rate) 5734
    Cost of Sales—Service Labor Franchise/Other—Internal (at cost)   6730, 6731  
    Cost of Sales—Service Labor Quick Lane—Internal (at internal rate)   6735  
    Cost of Sales—Service Labor Quick Lane Tires—Internal (at internal rate)   6734  
      Inventory—Labor in Process     1440
           
  Accessories installed in a new car I  
    Inventory—New cars Franchise/Other   1300, 1305
      Inventory—Parts—Franchise/Other     1400, 1410
      Inventory—Parts—Quick Lane—Tires     1405
      Inventory—Parts—Quick Lane     1406
      Sales—Service Labor Franchise/Other—Internal     5730, 5731
      Sales—Service Labor Quick Lane—Internal     5735
      Sales—Service Labor Quick Lane Tires—Internal     5734
COMMENTS
  • See below for methods of calculating internal labor sales rate and costs.
  • Mark-ups are applicable only to internal labor performed for other departments. Internal work performed by employees for their own departments should not be treated as internal sales but should be charged to the appropriate asset or expense account at cost and credited to the account originally charged with their labor.
  • Account 5840/6840, 5841/6841, Internal labor Franchise/Other—Body Shop, should be used for internal work performed by body shop technicians.
  • A high ratio of internal labor sales to customer paid labor sales may indicate inadequate service capacity for paid labor work.
  • Authorization from the appropriate department manager should be obtained on internal repair orders.
Calculation of Internal Labor Sales Prices

Sales of service department labor performed for other departments should be priced at rates sufficient to recover the wages paid plus an equitable share of the overhead of the service department, and should not exceed the retail labor rate. Two suggested methods of accomplishing this objective are outlined below:

Method 1

This method is recommended as being the most accurate and equitable basis for determining an internal hourly sales rate.
a. Determine the overhead rate per hour by making the following calculation:
Total annual service department expense
(service sales expense plus assigned portion of fixed expense from the Departmental Profit Summary, Form FMC 101, or total service department expense from the Departmental Income and Expense Statement, Form FMC 102)
Divided by total available productive man-hours
(total number of work stalls divided by 1.5, multiplied by annual number of hours open for service)
(1.5 is a representative standard number of work stalls required per service technician)
Equals overhead rate per hour.
b. Determine internal hourly sales rate by adding the overhead rate per hour calculated in a. above to the direct labor cost per hour developed in a. above.
Method 2
a. Technicians paid at a flat rate per hour or on a percentage of each labor sale:

Price commission technicians’ labor at retail rate less 20%
    Assuming a retail labor rate of $30.00 per hour, the internal labor rate, including overhead, would be $24.00 per hour ($30.00 less 20%, or .80 X $30.00=$24.00). Assuming the technician receives $12.00 per hour, the overhead rate per hour would be $12.00 ($24.00 less $12.00).
b. Hourly-rated technicians and other service employees:

Price hourly technicians’ labor at actual hourly rate plus the overhead rate determined as outlined in a. above in Method 2.
Under either method, the labor sales rate should be recalculated periodically as required by changes in the retail labor rate, technicians’ hourly rates, or significant changes in overhead items.

Calculation of Cost of Internal Labor Sales

Internal labor sales may be costed by one of the two methods outlined below:
a. At actual cost: labor time multiplied by the labor rate of the technician who did the work.
b. At the weighted average hourly cost of technicians’ labor determined as follows:
Number of
Technicians
2
3
2
7		 Hourly
Rate
$10.50
 11.50
 13.00		 Total Cost
per Hour
$21.00
 34.50
 26.00
$81.50
    Weighted average labor cost per hour: $81.50 divided by 7=$11.65
The above assumes that all the technicians work the same number of hours each week.