Dispelling the Myths About Unapplied Labor: Part 1
When it comes to dealership unapplied labor, there are a lot of misconceptions floating around. Many people don’t understand what unapplied labor is, and even fewer know how to manage it properly. In this post, we’ll clear up the confusion, help you effectively deal with unapplied labor in your service department, and improve your gross profit.
What is unapplied labor? Is it the same as unapplied time?
Unapplied labor and unapplied time are used interchangeably in the service department. Unapplied labor is when a shop pays an apprentice or technician to complete jobs, and the time spent is not reflected anywhere on the repair order. Therefore, the technician’s labor cost is not charged on the repair order. Instead, it is expensed as payroll on the financial statement in the unapplied labor column or hourly service staff payroll column. As opposed to a flat-rate technician’s time, their labor cost is billed to a work order and then offset to the work-in-process account (WIP).
What is a work-in-process on repair orders?
The work-in-process account (WIP) reflects only those jobs which have flat-rate technicians working on them. Work-in-process is how the service department keeps track of flat-rate owed to technicians. The two most common information on WIP reports is the repair order number and the amount owed to the technician.
The repair order credits the WIP account, and the technicians’ paycheck debits the WIP account. A healthy work-in-process account should only have credits or zero balances. If there are debits in the WIP account, service managers need to investigate them.
Does unapplied labor get posted to the WIP account?
This is a frequently asked question, and the answer is no. Unapplied labor is not posted to the WIP account. Unapplied labor is an expense and has its own account on the financial statement.
What is the difference between applied vs unapplied labor?
Unapplied labor (paid hourly) is when the service department pays an apprentice or technician to complete a job, and the time spent is not reflected in the repair order. The cost of the technician’s labor is not charged on the repair order, their predetermined hourly rate is expensed as unapplied labor instead. Hourly technicians are paid whether they are productive or not.
Applied labor (flat-rate) is when the service department pays a technician a flat rate for their time only when they are working on a vehicle. The flat-rate time is reflected in the repair order as billable hours. Flat-rate technicians are solely paid when they are productive. The WIP account reflects only those jobs which have flat-rate technicians working on them and the contra account is the cost of labor sales.
We’ll use the following scenario to explain the difference:
Alice brings her car into the service department for an oil change and tire rotation. Bob is the apprentice who will perform the service and is paid an hourly wage. Since Bob is an hourly paid employee, the time he spent on Alice’s car is not charged out on her work order. Instead, it is expensed to the unapplied labor account.
In this example, the cost for Bob’s labor is considered unapplied labor because it is not being charged to Alice’s repair order. The WIP account would not reflect his time because Bob is paid for working a full shift even when he standing around waiting for the service customers to arrive.
Applied labor (flat-rate)
Alice brings her car into the service department for an oil change and tire rotation. Bob is the technician who will perform the service and is paid a flat rate. Since Bob is a flat-rate paid employee, the time he spent on Alice’s car is charged out on her work order.
When the work order is updated into accounting, Bob’s flat labor rate gets posted to the “work-in-process” or WIP account, where it sits and waits as a credit balance. Bob is paid one week later, and his paycheck debits the WIP account. Now, the WIP account is at a zero balance.
In this example, the cost for Bob’s labor is considered applied labor because his hours worked are charged to Alice’s repair order. The WIP account reflects his time because Bob is paid a flat-rate. In other words, Bob is only paid when he is working on a car and not when he standing around waiting for the service customers to arrive.
Most companies prefer to pay their techs using flat-rate systems, the belief is that it will improve technician productivity, which in turn will also increase the number of cars serviced in a day and the gross profit margin.
With flat-rate pay, techs are paid by the job, which can motivate them to be efficient and more productive with hours worked. For example, if a repair pays 0.5 hours but the tech finishes in 0.3 hours, he just earned 0.2 payroll bonus hours, and the service department can increase sales because they can service more customers in a day.
But flat-rate systems can also hurt techs too! For example, a service repair pays 0.5. However, the component on a car is seized, and it took the tech 0.8 to complete the repair. The tech’s hours worked dropped by 0.3, and the service department sales decreased because they will have fewer service customers in a day.
Flat-rate systems are easily trackable since they’re billed directly to the customers’ invoices. Management can keep an eye on the department’s health because efficiency and productivity are metrics side effects created by using the flat-rate system. Flat-rate systems also help management track the department’s gross labor profit margin, forecast labor sales, and hours worked more precisely by billing flat-rate pay directly on customers’ jobs.
What else is considered unapplied labor?
The term unapplied labor can apply to other scenarios in the service department. The primary term for unapplied labor refers to hourly paid apprentices or technicians whose labor expense is not billed on the service repair order. But a technician’s guarantee, technician bonus, and payroll adjustments can also affect the unapplied labor account. Review the financial statement each month to ensure this metric is within an acceptable benchmark.
Here is a breakdown of all four unapplied labor examples:
Hourly apprentices and technicians
Hourly technicians are paid based on the hours they are expected to remain for their shift at the service department each day. Basically, if an hourly technician is expected to work an 8-hour shift, they are paid for that time regardless of whether they worked on a customers car, cleaning the shop, or driving around picking up spare parts.
The technician’s hourly wage is expensed to the unapplied labor account, not the work-in-process account.
Technician guarantees or wage top-ups apply to flat-rate technicians to ensure they will earn no less than an agreed-upon income. Most dealerships use this technique to ensure flat-rate technicians will work on weekends and stay for the entire day.
An example is if the dealership guarantees their flat-rate technician will earn a minimum of 5 hours on Saturdays. The techs flagged hours against the repair order on Saturday only produced 3 hours; their wage is topped-up 2 extra hours since they are guaranteed 5 hours pay. The additional 2 hours of wages paid to the technician is considered unapplied labor and expensed to the unapplied labor account.
Performance, productivity, CSI bonus, and unapplied labor
Performance bonuses are paid to flat-rate technicians whose productivity hours have exceeded an agreed-upon performance target. For example, the service department pays its technicians a performance bonus when they produce 50 or more hours during a bi-weekly pay cycle. The service department will pay a technician $1.00 extra per hour they produce. If their productivity hours exceed 60 or more, then techs earn $1.50 extra. The performance bonus paid to the technician is considered unapplied labor and expensed to the unapplied labor account on the financial statement.
Technician payroll mistakes, adjustments, and unapplied labor
Mistakes happen; sometimes a technician is paid for the wrong job or at an incorrect rate. It would be great to catch these mistakes before the repair order is closed because they are easier to fix. It becomes complicated once the repair order is closed and updated into accounting. To make payroll adjustments in accounting depends on the technician’s pay type; flat-rate or hourly. It’s better to ask the office manager to help with the accounting adjustments.
Flat-rate technicians: To correct mistakes made on a flat-rate technician’s payroll, the work-in-process needs to be adjusted to reflect the plus or minus wage discrepancy and cost of sales account to reflect the billable hours.
Hourly technicians: The plus or minus wage discrepancy is posted to the unapplied labor expense account to correct an hourly technician’s payroll mistakes.
What is the difference between unapplied time and unapplied labor?
Unapplied time and unapplied labor are the same and can apply to apprentices or technicians. Unapplied time refers to the hours spent working on jobs, and unapplied labor refers to how much wage the jobs cost the dealership.
Unapplied time is simply the time it took to complete a job that cannot be billed out on a repair order. The unapplied time could represent the total amount of time or just a portion of customer jobs.
At some shops, jobs are paid based on a predetermined time and amount, this is called flat-rate. Sometimes, due to unforeseen circumstances, a flat-rate technician takes longer than the allowable billable time to complete the repair (hours worked). The difference between the allowable billed time and the actual time paid to the technician is called unapplied time.
Unapplied labor refers to the dollar amount paid to an apprentice or technician (not billed to jobs on repair orders). Unapplied labor could also represent the difference between an allowable billed amount on the repair order and the actual amount paid to the technician. The additional cost is recorded as an expense on the financial statement.
Unapplied labor conclusion
Service department unapplied labor is when the shop pays an apprentice or technician to complete a repair that is not charged on a customer’s repair order. The unapplied labor is expensed on the financial statement as a payroll expense. Under normal circumstances, the technician’s time is billed to a work order and offset to the work in process account (WIP).
In part two of this series, we’ll explore how to find, fix and prevent unapplied labor mistakes from happening in the first place. Read part two of How To Find And Fix Unapplied Labor Mistakes!