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

Wednesday, February 14, 2018 - 09:00
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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).

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