460B Service Contracts Customer Labor –
Cars & Light Duty Trucks

461B Service Contracts Customer Labor –
Commercial, Fleet, & Medium Duty Trucks

Sales

Fixed Operations

Sales Synopsis

Accounts 460B and 461B are established to record Service Contract Labor sales paid by Service Contract Underwriters including GMPP for repairs performed under Service Contract coverage by the Mechanical Department.  Account 460B is for Cars & Light Duty Trucks and Account 461B is for Commercial, Fleet, & Medium Duty Trucks.

Debits

Credits

 

  1. Actual selling price of mechanical labor performed under the coverage of Service Contracts

  2. Revenue from sources such as towing, battery-charge services and washes in connection with mechanical repairs

 

660B Service Contract Customer Labor –
Cars & Light Duty Trucks

661B Service Contract Customer Labor –
Commercial, Fleet, & Medium Duty Trucks

Cost of Sales

Fixed Operations

Cost of Sales Synopsis

Accounts 660B and 661B, respectively, are established to record the Cost of Sales, which is defined as compensation paid to technicians, for Service Contract Mechanical Labor.

Debits

Credits

  1. Cost of mechanical labor related to Service Contract labor sales

 

 

Example 1

Record a customer repair order for a service contract repair in the amount of $305.  The service contracts customer labor sale is $170.  The parts sale is $120.  The shop supplies are $9 and the sales tax is $6.  The cost of the labor is $40.  The parts cost is $80 and the shop supplies is $7.

Journal: Service Sales - Charge

Entry:

 

Debit

Credit

Account 220B

Accounts Receivable – Customers – Service & Parts

$305

 

Account 660B

Cost of Sales – Service Contracts Customer Labor – Cars & Light Duty Trucks

$40

 

Account 667

Cost of Sales – Parts – Mechanical Repair Orders – Cars & Light Duty Trucks

$80

 

Account 669

Cost of Sales – Shop Supplies

$7

 

Account 242

Inventory – Parts & Accessories

 

$80

Account 242

Inventory – Parts & Accessories

 

$7

Account 247A

Inventory – Work in Process - Mechanical

 

$40

Account 460B

Sales – Service Contracts Customer Labor – Cars & Light Duty Trucks

 

$170

Account 467

Sales – Parts – Mechanical Repair Orders – Cars & Light Duty Trucks

 

$120

Account 469

Sales – Shop Supplies

 

$9

Account 324

Sales Taxes Payable

 

$6

Example 2

Record a customer repair order for a service contract repair in the amount of $443.  The service contracts customer labor is $200.  The parts sale is $220.  The shop supplies are $11 and the sales tax is $12.  The cost of the labor is $50.  The parts cost is $150 and the shop supplies cost is $8.

Journal: Service Sales - Charge

Entry:

 

Debit

Credit

Account 220B

Accounts Receivable – Customers – Service & Parts

$443

 

Account 661B

Cost of Sales – Service Contracts Customer Labor –– Commercial, Fleet, & Medium Duty Trucks

$50

 

Account 668

Cost of Sales – Parts – Mechanical Repair Orders –Commercial, Fleet, & Medium Duty Trucks

$150

 

Account 669

Cost of Sales – Shop Supplies

$8

 

Account 242

Inventory – Parts & Accessories

 

$150

Account 242

Inventory – Parts & Accessories

 

$8

Account 247A

Inventory – Work in Process – Mechanical

 

$50

Account 461B

Sales – Service Contracts Customer Labor – Commercial, Fleet, & Medium Duty Trucks

 

$200

Account 468

Sales – Parts – Mechanical Repair Orders – Commercial, Fleet, & Medium Duty Trucks

 

$220

Account 469

Sales – Shop Supplies

 

$11

Account 324

Sales Taxes Payable

 

$12

Note:

Labor sales can be cost either on an actual basis or on a percentage basis.  However, it is recommended that whenever practicable labor sales be costed on actual basis because material losses of productive time may be concealed by the inaccuracies inherent in percentage costing methods.  Such inaccuracies can result from failure to update costing percentages when changes occur in the compensation of technicians and in the structural of selling prices of labor, and from other reasons.

 

The following examples show how labor may be costed under various compensation plans:

 

1.               Technicians are paid on a flat rate hour and customers are billed on a flat rate hour.

·        Actual costing may be accompanied by multiplying the technician’s flat rate by the flat rate hours spent on a particular job.

·        Percentage costing may be accomplished as illustrated below.

 

2.               Technicians are paid an hourly rate and customers are billed on a flat rate hour.

·        Actual costing may be accomplished by multiplying the technician’s hourly rate by the hours spent on a particular job.

·        Percentage costing cannot be accomplished with any degree of accuracy.

 

3.               Technicians are paid on an hourly rate and customers are billed on an hourly rate.

·        Actual costing may be accomplished by multiplying the technician’s hourly rate by the hours spent on a particular job.

·        Percentage costing may be accomplished as illustrated below.

 

4.               Technicians are paid a percentage of customer labor sales.

·        Actual costing may be accomplished by multiplying each labor sale by the percentage received by the technician.  Actual costing may also be accomplished by applying the percentage to the total labor sales at the month end.

·        Percentage costing does not apply under these conditions.

 

5.               Technicians are paid a minimum guarantee with additional compensation based on production which cannot be determined until the end of a pay period.

·        Actual costing cannot be accomplished.

·        Percentage costing, in this instance, may be accomplished as illustrated below with the exception of Step #1, which should be revised as follows:

·        Total Productive Wages including incentives
( 8 Technicians for a 12 week test period)

 

 

 

 

 

$54,910

·        Total Hours Worked

/ 3,800

·        Hourly Prime Cost of Labor

$14.45

 

It is preferred that added incentive pay of technicians and compensation of technicians’ helpers be comprehended in the costing of labor sales.  Therefore such pay should be debited to Acct. 247.  If this is not practicable, such pay should be debited to Acct. 665 and 675, as applicable.

 

EXAMPLE FOR DEVELOPING PERCENTAGES TO

BE USED IN COSTING LABOR SALES

 

STEP #1:   Determine the weighted average hourly rate of technicians.  This is the hourly prime cost of labor.

 

 

Number of

Technicians

 

Hourly

Rate

 

Compensation

 

2

X

$16.00

=

$32.00

 

3

X

$17.00

=

$51.00

 

3

X

$15.00

=

$45.00

TOTAL

8

 

 

 

$128.00

 

 

 

 

 

/ 8

 

 

 

Hourly Prime

Cost of Labor

$16.00

 

 

 

STEP #2:   Determine the effective selling price of customer labor by sampling a consecutive number of repair orders.

 

·  Total customer labor sales on repair orders examined

$21,900

·  Number of labor hours sold on repair orders examined

/ 500

·  Effective Customer Selling Price of Labor

$43.80

 

 

 

STEP #3:   Determine the percent of the effective customer selling price that represents cost.

 

·  Hourly prime cost of labor (#1)

$16.00

·  Effective customer selling price of labor (#2)

/ 43.80

·  Costing percentage of Customer Labor Sales

36.5%

 

 

 

STEP #4:   Determine the percent of internal selling price that represents cost.

 

·  Hourly prime cost of labor (#1)

$16.00

·  Internal selling price of labor

/ 39.42

·  Costing percentage of Customer Labor Sales

40.6%

 

 

NOTE:

This study should be repeated whenever changes occur in either the hourly rate of technicians or the selling price of labor.