DISTRIBUTION OF EXPENSES

Managing an automobile dealership is an inherently difficult task.  Since dealerships are made up of New & Used Vehicle Sales Departments, Service, Parts & Body Shop Departments and more recently separate F & I and Lease & Rental Departments, running a dealership is equivalent to operating six (6) or seven (7) companies under one roof.  In order to keep track of performance in each Department, it is necessary to adopt a “Profit Center” approach.  Under a Profit Center structure, each Department is responsible for generating its own Sales & Gross Profit, controlling Expenses and producing an Operating Profit.  Each Department manager must be held accountable for producing results and contributing to the overall “Bottom Line” of the entire Dealership.

The General Motors Dealer Operating Report is designed to show Sales & Gross Profit results for each Department.  However, this alone is not enough.  It is important to allocate Expenses to each Department in a fair and consistent manner.  Each Department Manager should be given the responsibility and the authority to control Departmental Expenses by reasonable budgeting & forecasting and monitoring the Daily Operating Control (DOC) report.

One difficulty with this concept is the proper allocation of Expenses.  Some Expenses such as the New Vehicle Floorplan Interest are clearly identified with the operation of the New Vehicle Department.  On the other hand, Expenses such as Rent must be charged to each Department on a “Fair Share” basis.  The methods to develop a fair share basis for the Dealership follow below.

The cardinal rule for handling Expenses is that whenever an Expense can be identified and associated with a specific Department, the entire Expense should be charged to the Department.  When more than one Department share an Expense, the amount of the Expense should be pro-rated between Departments.  The procedures to distribute Expenses follow.

Expenses should be distributed, on any one or any combination of the following basis, to Departments which:

1.      are DIRECTLY RESPONSIBLE FOR incurring the expense.

2.      receive the DIRECT BENEFIT OF the expense.

3.      SHARE IN THE BENEFIT of the expense.

Each department should be viewed as a separate entity. There are expenses, which each Department must incur in order to continue operations.  Using Rent as an example, the monthly Rent should be allocated on a reasonable basis to ALL DEPARTMENTS of a dealership. Department Mangers are NOT DIRECTLY RESPONSIBLE FOR THE INCURRING OF RENT EXPENSE, BUT ALL RECEIVE THE BENEFIT OF THE DEALERSHIP’S REAL ESTATE.

General and Administrative Expenses (G & A) should be viewed as a RESPONSIBILITY OF GENERAL DEALERSHIP MANAGEMENT.  G & A expenses are those, which do not directly or indirectly benefit any single Department, but are associated with the continuing operation of the entire business organization.  An example is the salary of an owner who functions as a general manager.  Typically, General and Administrative expenses are USUALLY MINIMAL in relation to total Expenses.

No Expense item should be arbitrarily prorated to operating Departments.  An item of Expense should not be haphazardly classified as General and Administrative because it is not directly incurred by or for a specific Department.  It is ESPECIALLY IMPORTANT that no Expense should be classified as General and Administrative simply because it appears to be too difficult to allocate on a reasonable basis.

Most Expenses have a clear, definable nature and can be reasonably and accurately distributed to specific Departments.  Expenses which cannot be so easily defined MUST BE ANALYZED, and reasonable decisions must be made as to their proper distribution. THIS IS THE RESONSIBILTY of the accountant.

The GM Dealer’s Standard Accounting provides for Expense Distribution designations through the use of a numbering system to identify each Department:  It is shown in the table below.

Expense account numbers classify the expense and the two-digit code (above) identifies the Department to which the expense is to be distributed.

Distribution Examples

Examples of proper Expense Distribution follow below.  The examples are specific rather that general so that the rationale for distributing the Expense is clear.  For instance, in Account 051, Company Vehicle Expense, “the allowance to the office manager using a personal vehicle to make bank deposits, credit collection, etc.” should charged to the General and Administrative Department.  From this, a generalization can be inferred that an allowance to any employee using a personal vehicle for company business should be charged to the Department for which the vehicle is used.

No attempt is made to cover all possible Expenses, which a dealership may incur.  The examples are provided merely to show typical items to be charged to each expense account, and to serve as an aid to correctly distribute Expenses that are common to all GM dealerships.  Therefore, a dealership may incur an Expense that is not shown; but the examples should provide assistance in correctly distributing that Expense.

We are suggesting only one reasonable method to determine the manner in which a particular Expense item should be distributed.  There may be other methods, which a dealer feels are more reasonable and accurate for particular Expense items; if so, they should be used.

Glossary

In order to make the distribution examples concise, phrases are used to describe the basis for distribution; they are self-explanatory.  In some instances, certain key words are used in many Expense accounts. These are defined below.

·         AREA

Measure the square footage of each Department.  Then add up all the Departments for the Total Dealership as shown in the table below:  Calculate each Department’s percentage to the Total Dealership.

Multiply the total Expense by the respective percentage to determine the specific Department’s expense.

·         EMPLOYEES

Tabulate the number of employees in each Department.  Add up all the employees for the Total Dealership.  Calculate the percentage of each Department’s employees to the total number of employees as shown in the table below.

Multiply the total expense by the respective Department’s percentage to determine the specific Department’s expense.

·         EMPLOYEES PARTICIPATING

When NOT all employees are involved, “Employees Participating” refers to only the employees that incur an Expense such as Health Insurance coverage or Pension Plan eligibility.  Calculate the percentage of the Participating Employees in a Department to the total number of Participating Employees for the entire dealership.

Multiply the total expense by the respective Department’s percentage to determine the specific Department’s expense.

·         Relative Value Factor

The value assigned by the dealer to each department based on importance, location, etc. Multiply the total expense by the percentage of a specific department’s relative square foot value to determine that department’s expense.

EXAMPLE

·         TIME

An estimate of the reasonable amount of time devoted to a task by each Department should be used to calculate the respective Department’s percentage of the Expense.  An example is shown below.

Multiply the total Expense by the respective Department’s percentage to determine the specific Department’s expense.

·         USAGE

A reasonable estimate of the percentage of expense items (supplies, services, equipment, etc.) that a Department is projected to use should be calculated.  Tables similar to the ones above can be applied to this task.  Multiply the total Expense by the calculated percentage to determine a specific Department’s expense.

Note:    1.   Only expenses applicable to the operation of the business should be charged to the expense accounts.

Note:    2.   All expenses applicable to the sales of new and used other automotive merchandise and non-automotive-oriented merchandise should be classified in the regular expense accounts and distributed to the new or used vehicle department, as applicable, and the parts and accessories department, respectively.