463 Internal Labor - Mechanical

Sales

Fixed Operations

Sales Synopsis

Account 463 is established to record the amount of Internal Labor performed by the Mechanical Department.

Debits

Credits

 

  1. Internal selling price of servicing new vehicles in addition to factory specifications

  2. Internal selling price of reconditioning used vehicles

  3. Internal selling price of installing and removing accessories, optional equipment, tires and special bodies

  4. Internal selling price of dealer policy work

  5. Internal selling price of repair and maintenance of company-owned vehicles

  6. Internal selling price of maintaining used vehicles in salable condition

  7. Internal selling price of repairing customers’ vehicles due to employee negligence, for which an employee is not charged

 

663 Internal Labor - Mechanical

Cost of Sales

Fixed Operations

Cost of Sales Synopsis

Account 663 is established to record the Cost of Sales, which is defined as compensation paid to technicians for Internal Labor Sales.

Debits

Credits

  1. Cost of mechanical labor sold to other departments

 

 

Example 1

Record an internal repair order for reconditioning to a used truck that is in inventory in the amount of $400.  The internal labor is $300 and the part sale is $100.  The cost of labor is $90 and the part cost is $80.

Journal: Internal Sales

Entry:

 

Debit

Credit

Account 241

Inventory – Used Trucks

$400

 

Account 663

Cost of Sales – Internal Labor - Mechanical

$90

 

Account 681

Cost of Sales – Parts – Internal

$80

 

Account 242

Inventory – Parts & Accessories

 

$80

Account 247A

Inventory – Work in Process – Mechanical

 

$90

Account 463

Sales – Internal Labor – Mechanical

 

$300

Account 481

Sales – Parts – Internal

 

$100

Note:

Internal Sales

Because the term “Internal Sale” may be foreign to the accountant, a brief explanation is in order.  A retail selling price is generally arrived at by giving consideration to the following items:

 

 

Internal Sales are made up of prime cost and overhead only. Through the medium of internal sales, the selling department apportions its cost of doing business to another department within the dealership.

 

 

Internal Sales of Labor

It is recommended that labor sold internally be priced at customer price less 10%.  If preferred, a rate sufficient to cover the prime cost of labor plus a pro rata share of the service department overhead to be absorbed by labor sales may be used.  To determine this rate, the steps below should be followed:

 

 

Example

Step #1:  Estimate the annual total productive mechanical technician hours available.

 

  • Number of weeks per year
  • Number of days per week

52

X 5

 

  • Annual number of days
  • Less: Average number of days for vacation and holidays

 

260

- 15

 

  • Estimated total annual productive days available
  • Productive hours available per day

 

245

X 8

 

  • Annual productive hours available
  • Number of mechanical technicians

 

1,960

X 8

 

  • Annual Total Productive mechanical Technician Hours Available

 

15,680

 

 

 

Step #2 Estimate the mechanical fixed overhead expense per productive hour.

 

  • Estimated annual mechanical fixed overhead expense
  • Estimated annual gross profit applicable to mechanical sales of sublet repairs and parts and accessories on custom repair orders

$357,464

 

- $47,000

 

  • Mechanical fixed overhead expense to be absorbed by labor sales
  • Annual total productive mechanical technician hours available (#1)

 

$310,464

/ 15,680

 

  • Mechanical Fixed Overhead Expense per Productive hour

 

$19.80

 

 

 

Step #3:  Compute the weighted average hourly wage paid mechanical technicians.  This is the hourly prime cost of labor.

 

 

Number of Technician

 

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 #4:  Compute the internal selling price of mechanical labor.

 

  • Mechanical fixed overhead expense per productive hour (#2)
  • Hourly prime cost of labor (#3)

$19.80

$16.00

  • Internal Selling Price of Mechanical Labor

$35.80

 

The preceding example determines the internal selling price of mechanical labor.  If the dealership has a body shop operation, separate rates should be used for the internal sales of mechanical and body shop labor.  The above steps should be followed, substituting the number of body shop technicians and their hourly rates; the gross profit applicable to body shop sale of sublet repairs, parts and accessories on custom repair orders, and paint and body shop materials; and the estimated annual body shop fixed overhead expense.

 

Transactions, which are related, should be recorded in separate sub-accounts.  Sub-accounts serve to keep records organized for future analysis and auditing.  The sub-accounts in these examples are designated by a letter following the account number (suffix).  Please refer to your DSP's instructions for establishing sub-accounts.