The Other Side of Estimating

      How good cost accounting keeps your pricing structure 'honest.' 1998.

by Anthony Noel

Cost accounting, the 'flip side' of the estimating process, is a necessary step to determine whether you are, in fact, making money.

When you reach the end of a project, when the delivery and installation are complete, when all the tools are put away, the shop floor has been swept, and the final invoice has been paid, the health of your business demands that one final operation be executed.

It doesn't happen in the shop or on the phone with your client or supplier. It happens at your desk or computer, and it is crucial to your long-term success in custom woodworking. It is cost accounting.

Also known as 'costing,' cost accounting is essential to determining everything from your hourly rate to overall profitability. Costing also makes you more aware of your overhead expenses and therefore, more alert to ways of containing such costs.

Cost accounting is a tool which helps you keep your shop lean and mean; in short, more competitive.

Costing is all about keeping tabs on variables. It teaches you, on a job-by-job basis and with microscopic accuracy, why you did or did not make the money you expected to.

Costing looks at every expense you incur during the course of a job, allowing you to compare those real costs to your estimate. Then, taking what you've learned, you'll be able to produce a more accurate estimate the next time.

In addition, accounting goes beyond a job-by-job function. By taking the averages of your completed jobs over, say, a year's time, you can better predict and plan for profitability in the years ahead.

Accurate cost accounting does not require college courses or an accountant's input (or invoices!). Though it may sound forbidding, costing requires only the math aptitude of the average, you guessed it, custom woodworker, and a little common sense. These traits, applied with the guidance of the following statement, will put you well on the way to determining your shop's profitability: 'Cost accounting should give me a clear picture of what it really costs to do any given job.'

In order to get the most accurate picture of what it really costs you to do a job, you need to keep track of all your expenses. This not only means materials, but also labor and overhead items, like shop rent, utilities, insurances, taxes and the like. Anything you buy to run your shop has to show up in one of these three categories. And all of it must be taken into account to perform accurate costing.

Though this may sound daunting, take heart: the real beauty of costing is that you can use the same form for ordering job materials, tracking hours worked and reconciling the sum of these factors, plus your overhead numbers, and do all this with reality.

Cost accounting is really estimating in reverse. Only this time, there's no estimating involved. The numbers are in. All you need to do is total them up and use what they teach you.

Remember, good cost accounting can mean the difference between breaking even and turning a profit. And seasoned with a little common sense, it doesn't need to become drudgery.

Yours, Theirs and Hours
As the owner of a small business, you'll be putting in a lot of time. Almost from the moment you rise in the morning, the vast majority of your thoughts, acts and deeds will be tied in some way to making your business work. But where do you account for all these hours? Is it realistic to factor 16-hour days into your cost accounting process? And if not, at what point should do your hours cease to be 'on the clock?'

What we're talking about here is the difference between what I call 'billable' hours, 'overhead' hours and 'contributed' hours. Let's take a look at each, on the assumption that you want to make, say, $40,000 per year.

'Billable hours' is the term I use to define hours I work in the shop and on installations - in short, in any way that I can consider the application of my trade. These hours are kept on a time card and entered under my name on my cost accounting form for the job in question. I try to work 30 hours per week in the shop, at a minimum.

'Overhead hours' defines time I work in the office, and I generally figure on 20 hours per week there. I account for this time within my overhead rate. On my worksheet, I have a separate space for 'salaried' time. Because 20 hours (office time) plus 30 hours (shop time) gives me a fifty-hour week, I stop counting here. Twenty hours is two-fifths of 50. So, in my overhead figuring, I would enter $16,000 under 'salaried' time (two-fifths of $40,000).

Returning for a moment to billable hours, I need an hourly rate which, at 30 hours per week, rounds out the $40,000. If I work 30 billable hours per week for 50 weeks per year ( I need a two week vacation, after all!) I'll put in 1,500 billable hours. Divided into the remaining $24,000 I want to make, my hourly rate in the shop (and on the costing form) will be $16.
'Contributed hours' do not show up on any form, but as you undoubtedly know, they come with the ownership turf. You could try to count these hours, but it would make you crazy. ( 'I put in how many free hours last year?')

You may think long and hard about business issues and even do some extra time at your desk or in the shop at some unlikely hours. During your last round of golf or that recent weekend trip with the family, you may have been completely preoccupied with solving a design problem.

But consider counting six 16-hour days (even with that two-week vacation!) for a year's time. That's 4,800 hours per year. Try charging for those hours, and see how competitive your shop becomes!

Some things we do in life because of the freedom they give us in return. Owning your business is one of those things.

Anthony Noel writes, consults, and teaches woodworking and journalism, along with doing an occasional custom job in his shop in Macungie, PA.

Have a business related question? Visit WOODWEB's Business Forum. The Business Forum is co-sponsored by ISWonline and is moderated by Anthony Noel. All business topics are welcome, from sales and marketing to dealing with difficult customers.

This article is reprinted by permission of Custom Woodworking Business Magazine.

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