Unapplied time or adjustment to the cost of labor is accounted for on all financial statements under the name of “unapplied time” or “adjustment to cost of labor” on the sales and gross profit page. Some dealers choose not to use this line to account for the unapplied time. It may go to another account like “other salaries and wages” as an expense. In any case, it should be understood what the definition of unapplied time is.
A simple way to define this metric is “any time paid to a technician that is not applied to a repair order” would be considered unapplied time. Typically, when a technician’s time or cost of labor is recorded on a repair order, it will reflect on the statement when the repair order is closed in accounting. When there is time on a repair order and the repair order is not closed, it will be recorded as work in process. When the month closes, any time paid that is not recorded on a repair order would be “unapplied.”
In some cases, this difference is accounted for by manually making an adjustment to the cost of sale in accounting. In this case, the unapplied line on the statement would be blank. This method makes it more difficult to manage if it is not reflected accurately on the statement.
Some common causes of unapplied time are:
Hourly technicians are sometimes called “helpers” or “apprentices” and are assigned to a more senior technician as their mentor. Most often these helpers are paid hourly, and their time spent helping to produce labor is not applied to the repair order, and the mentor is paid for the job. All the time will be recorded as unapplied.
One method to avoid this is to account for the mentor’s and the helper’s time on the repair order. This will reflect the true cost of sale for that job for both technicians. The flat-rate technician will be costed at their rate per flat-rate hour, and the hourly technicians clocked on the job will be the actual cost, and the remaining will be unapplied.
The difference between the amount paid and the time billed due to a guarantee can be applied to the cost of sale as a manual adjustment. The same is true with production bonuses. In some cases, the additional pay from guarantees and bonuses is expensed as other salary and wages instead of the cost of labor.
In any case, the ability to properly manage this metric is dependent on accounting for wages paid and not billed on a repair order.
The first step would be to identify what/who is being charged to unapplied time. Separate hourly from flat-rate technicians. Ensure hourly technicians are clocked on the repair order when they are producing or helping produce labor. Any time deliberately paid to a technician that is more than billed can be accounted for by adding an internal line and applying the time to that line. Guarantee and bonus amounts should be added to the cost of sale instead of expensing in other salaries and wages. Ensure all technicians have a production objective, especially the hourly technicians. Managing their objective can help identify opportunities for improvement.
Accounting for unapplied time can be handled in different ways in accounting; however, the ability to manage this important metric is diminished when not applied correctly. Gross profits are not reflected properly in the different labor sale accounts and are often overstated. It is when the statement is finalized for the month, and a huge portion of gross profit is subtracted from the total labor gross in the end.