International Door & Operator Industry

NOV-DEC 2013

Garage door industry magazine for garage door dealers, garage door manufacturers, garage door distributors, garage door installers, loading docks, garage door operators and openers, gates, and tools for the door industry.

Issue link: https://idoi.epubxp.com/i/216705

Contents of this Issue

Navigation

Page 50 of 131

MANAGEMENT (continued from page 46) Unfortunately, few dealers have either the staff or software to adequately record all materials cost information. This is not to suggest that dealer's book costs are always conspicuously wrong, but that in most cases, the actual hard materials cost of any project is probably a few percentage points off, but the variance can be corrected by appropriate year-end accounting. However, if the "materials" line on the income statement is based on "book" (database) information, and the information is even slightly outdated or incorrectly recorded, then the calculated gross margin is going to be at least somewhat wrong, as noted in the "Incorrect" column of Exhibit 3. calculations, and gross margin may be legitimately expanded or contracted depending on the methodology chosen. However, let's not sidetrack this discussion about margin with a long detour into inventory valuation methods (e.g., LIFO vs. FIFO) or the handling of work in progress. Moreover, it is important to avoid confusing "job costing" of individual transactions with accounting procedures to determine gross margin, which summarizes all transactions recorded during a defned time period. The key materials cost question for most garage door dealers is " … where does the cost information come from?" Typically, dealers have a database of product costs, which should be based on current prices being paid to vendors, and organized by product type (e.g., steel, wood, insulated, style, etc.), size, features and other variations. That database must be continually updated and refreshed to refect all transactions that alter material costs as they occur. Many signifcant larger jobs have door and/or operator costs that are negotiated separately with vendors apart from the prices being paid for "standard" orders. Also, various adjustments and charges keep material cost data in a state of fux. The fundamental equation that must be included either explicitly or implicitly in all income statements is noted below and displayed in the "correct" column of Exhibit 3: Cost of Materials Used (COMU) = Beginning Inventory + Purchases + Inbound Freight, minus Terms Discounts Taken minus Ending Inventory Exhibit 3 Up&Down; Garage Doors, Inc. Annual Income Statement % of Sales Gross Margin derived INCORRECTLY Gross revenues $3,623,000 - Sales tax collected (7.0% on = $2.5 million) ˜ - Returns & allowances - Credit Card Fees = Net Sales Begin inventory + Purchases + Freight - Terms discounts subtotal - Ending Inventory Book Materials Used = COMU 100.0% % of Sales Gross Margin derived Correctly $3,623,000 175,000 106.6% -5.1% 12,000 36,000 3,400,000 -0.4% -1.1% 100.0% 312,000 1,574,000 75,000 (21,000) 1,940,000 (288,000) 9.2% 46.3% 2.2% -0.6% 57.1% -8.5% 1,652,000 48.6% 74,000 2.0% 1,565,000 1,639,000 43.2% 45.2% 467,000 12.9% 467,000 11,000 13.7% 0.3% Payroll taxes (FICA, etc.) Workman's comp ins Healthcare ins 401K contributions Total benefts Total benefts as % of wages & incentives = Total direct labor 467,000 12.9% Subcontract labor 10,000 0.3% COMU+Labor=COGS 2,116,000 58.4% 36,000 29,000 39,000 6,000 110,000 588,000 10,000 2,250,000 1.1% 0.9% 1.1% 0.2% 3.2% 23.0% 17.3% 0.3% 66.2% $1,150,000 33.8% Direct labor wages Direct labor incentives Sales-COGS=GM 48 $1,507,000 41.6% International Door & Operator Industry™ Even rudimentary accounting software includes a "purchases journal" which, if properly coded, will yield the materials acquired, and freight and terms (cash) discounts can be isolated by referencing vendor invoices and tracking accounts payable. That leaves inventory as the primary "villain" to distort COMU. Tracking, counting and costing inventory is a long and tortuous subject that is far too extensive and frustrating to discuss here. Ending inventory must be accurately counted (usually referred to as "taking" inventory) or "book" inventory must refect Continued on page 50

Articles in this issue

Archives of this issue

view archives of International Door & Operator Industry - NOV-DEC 2013