Why clear cost definitions are needed for P&M accounting, accountability

Feb. 14, 2018
Differences in state laws or regulations contribute to the lack of an industry standard. Sales tax regulations defined by each state can vary significantly.

Working with jobbers, shops and manufactures across the continent, I have found several definitions of what people consider Paint and Materials (P&M).

Since accounting and accountability are both bi-products of keeping track of P&M, should there be a standard definition? 

Differences in state laws or regulations contribute to the lack of an industry standard. Sales tax regulations defined by each state can vary significantly. We have some states that tax all P&M purchases by the shop, others that have no sales tax and still more that follow some variation of what is taxed and what is purchased for resale. We can be fairly certain that the 50 U.S. states and the 10 Canadian provinces are not likely to adopt any uniform cost or definition.

Our insurance providers may often determine what they consider P&M via their reimbursement methods. I am not suggesting that the common practice of paying a flat rate per refinish hour is the best method or the worst. But for now it is the most common method.

Neither of these two outside methods (sales tax regulations nor insurance reimbursement practices) is necessarily the best way to account for P&M costs at the shop level. One is (for those states with some sales tax) a free accounting each business does for the state and pays to the state based on sales. And the other reimbursement method varies by region, bill payer and other factors. 

With other items, accounting and accountability are much easier defined. A hood or other body parts have a list price, a discounted or resale price making them clearly defined for accounting. This is the same for most hard parts, batteries, suspension parts, etc. A part bought should be directly related to a part sold.

With P&M, this is a grayer area. Each shop purchases most of these P&M items in bulk, uses them on each job and may or may not account for them on a per-job basis. The vast majority cannot or do not account for materials on a per-job basis. Yes, I know there are systems out there that can help with this and for some this has been a good solution. (We will discuss this more in a future article.)

But how about a standard? The sales side of the P&M equation is a given — it is one line (maybe two) on the bottom of each RO where all billed P&M are charged to the vehicle owner. So for now, if we use this as a standard, we have something we can agree on.

Looking to the cost side, we don’t have a clear industry-wide definition of what P&M costs are and equally important are not. Any good accounting system strives to align costs with a sale. Thereby creating a profit margin, and hopefully a positive one for the shop. 

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Looking at other aspects of the repair — such as labor — most shops have adopted the “loaded cost” as the cost of labor to be measured against labor sales, usually broken down in Body, Paint, Mechanical and Frame labor. Loaded labor cost is generally considered to include the employer’s taxes and benefits associated with the labor. So this loaded cost for most includes Workers Compensation insurance, employer-side payroll taxes and other benefits (vacation, medical insurance, etc.). 

Again, the sale of each labor type or category is captured for each RO.

P&M should have a clear definition for accounting and accountability. For example, some shops differ in how they account for non-included items, such as seam sealers, panel adhesives and fasteners. Some track these as a separate sale and some (internally account for) these as an added P&M CGS (Cost of Goods Sold).

Obviously, this accounting method can cloud the accountability side. Anytime we can track sales, we should endeavor to track the corresponding CGS.

P&M cost for most all cases includes all the materials that leave with the vehicle, as well as some items consumed or used during the repair. The car has parts, paint, primer, clear, etc., that upon delivery now belongs to the vehicle owner.

What about those other items that are consumed during the repair process — such as sand paper, masking tape, etc.? Some have argued that these are shop expenses; some have argued that these items are included in the P&M reimbursement. Some have stated that these are not to be included in the P&M billing as they are not part of the final product delivered. I would argue that if it is job specific, it is definitely a CGS, not an expense. 

Take a loaf of bread: the yeast and water needed for the dough to rise are both certainly part of the cost of that loaf of bread. Shouldn’t the same logic hold true for P&M costs for shops? Bread would not be bread if not for the yeast, which is killed during baking. So those incidental items that are needed for each specific job should be considered part of P&M CGS.

In many states, we are regulated as to what we can include in the P&M sale; the cost is left for us to calculate. Anything that is not billed as something else — like hoods, fenders, alternators stripes, adhesives, cavity wax, fasteners etc., which are not job specific) — should be considered CGS for P&M. We don’t need to split hairs or get buried in the minutia, but anything normally consumed when repairing a specific vehicle is part of CGS (either P&M or other CGS). This would include items such as razor blades, tack rags and other minor consumables for P&M CGS. Anything that can be billed as a separate line item should be billed as such and not included in P&M sales or CGS.

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