• WELCOME Grumblers
    Backup is now done at 3PM EDT. You may find the server down for up to two minutes at that time.

"Articles of Business" Contd.

bearcat99

True Grumbler
This is a related subject to the earlier "Articles of Business" thread:

For me the biggest problem with doing an accurate cost analysis for custom framing involves calculating labor costs.

Unlike "real" manufacturing where direct labor is booked as a COGS expense, I have found that when most custom framers talk (or brag) about their COGS %, labor expense is not included at all.

This is understandable, since most frame shop employees do not work on framing tasks exclusively all day long; different employees paid at different rates may be assigned the same type of work; employees typically do not clock in and out at the beginning and end of each framing job or task; and, most importantly, every job produced is more or less unique.

I'd be very interested to know if anyone has come up with a labor costing formula for custom framing that works for them.
 
Sponsor Wanted
I see you’ve got a huge response, as I did with my “Articles of Business” topic.

Strange how issues such as “Should I use masking tape?” can provoke a major debate yet talk about costing or pricing and the silence is deafening.

Anyway, I think you have answered your own question by highlighting the many variables, overlaps and complexities of custom frame manufacturing.
It is not possible in my opinion to accurately allocate labor costs to custom framing jobs.

But let’s say you were able to calculate precisely the labor costs for each job. What would you do with that information?
 

Bob Carter

SPFG, Supreme Picture Framing God
George makes an excellent observation. If you could develop such an analysis, would you do with this information?

But the more direct answer is a fundamental understanding of the numbers. It is inappropriate to add labor(an expense) into your CoG's. Cost of Goods is the total of monies spent to acquire those things that you sell (goods). If you bought something ready to sell (a print, ready made frame) it goes into Cost of Goods the same as a lite of glass or a length of moulding.

If we were sophisticated enough (we're not) to accurately track every component of manufacturing, and we could isolate those elements that were truly specific to the manufacturing( we can't), we might be able to determine an accurate cost of manufacturing. Then, as George so accurately points out, what do you do with that number?

The reality is there are specific rules of accounting and procedures that govern accounting. If you alter them to meet your needs, they no longer have value in a comparative analysis.

So, what do we do with a number like CoG? You use it to determine if you have sufficient margin to cover your expenses (labor, as well as your other expenses). The difference between your Gross profit dollars (margin) and your expenses equals your profit/loss. You don't have enough profit? You can sell more product, you can lower your costs, you can reduce your expenses, or you can raise your prices. But without a clear understanding of the numbers and their relationship and effect on each other, you're only guessing, anyway. It's really important that we use the terms correctly and consistently. (On another thread, Nona Powers quite correctly begs for some uniformity of terms and standards for materials to ensure we all speak the same language. Why not in accounting terms and principles?)When we stray from the standards, we lose the measure of the terms. It's true with matboard; it's true with the difference between costs and expenses.

I think the industry needs a lot of education on both fronts. Bless Nona for doing her part and welcome George on his side. We need more open and cordial discussion of the "FACTS" (sorry, Nona)if we are to get better about all facets of our businesses.

For me, I think both sides are critical to success. Knowing only one well is like learning to ride a bicycle with only one training wheel.
 
What Bob has just done is to make a very clear distinction between Cost of Goods and Cost of Manufacturing.
This is extremely helpful because we can now see that Cost of Manufacturing is only really useful in a true manufacturing context. For example, if a factory produces a number of distinct product lines it is necessary to know labor costs associated with each product to determine product profitability and also production line efficiency.

So why does Bearcat99 want to know Costs of Manufacturing?
I guess if you are referring to “Articles of Business” then it is because Vivian Kistler recommends calculating these costs and multiplying by a mark-up factor to give the price you should charge your customer.
This method may give you a fair price for each framing job if (and it’s a very,very big IF) you can assess manufacturing costs accurately for each job .
But will it give you a pricing system you can use? No!
What you’ll find is that your prices are much higher than your competitors on some jobs and much lower on other jobs. You’ll have to start adjusting prices to get in line with your competitors and you’ll wonder you ever went down that road in the first place.

There is a very important point here. The method in the book in question assumes that price is a function of manufacturing costs. It isn’t. For example, if you managed to negotiate a discount on your moulding you wouldn’t drop your retail prices would you?
In simple terms price should be as high as possible and costs as low as possible.
The truth is that pricing is not simple and requires constant effort to ensure profitability.

Bob Carter summed things up nicely when he said:
“You don't have enough profit? You can sell more product, you can lower your costs, you can reduce your expenses, or you can raise your prices. But without a clear understanding of the numbers and their relationship and effect on each other, you're only guessing, anyway."
 

bearcat99

True Grumbler
Here's "what I would do with that number" (accurate labor costing):

1. Quantify what types of framing jobs take excessive labor time to complete.

2. Analyze the numbers in relation to the performance of specific employees and pay rates.

3. Analyze the numbers in relation to daily/weekly shop workload, overtime, etc.

4. In general gather a clearer picture of what ALL the component costs of producing custom framing really are.

Adjusting profit margins by raising prices, lowering material costs or increasing sales volume--presumably after margins have already slipped--doesn't get you any further along towards understanding how this crucial variable affects your profitability.
 

Marc Lizer

SGF, Supreme Grumble Framer
Bearcat,

I could you take a moment to tell us a bit about your shop.

# of emps, # of jobs, etc.

I do this **** all day long. And it is rather fun. It is however dependent upon a myrad of factos, and, at times, useless in the wrong shop setting (a rather small shop).

This is the nature of custom work. Variation.
Account for it.
 

Marc Lizer

SGF, Supreme Grumble Framer
Allright. I hit wrong button too soon. . .

I'll continue.

In production it makes sense.

But here are some wrinkles for ya:

For instance, your #1.

I know what jobs take longer, and we charge accordingly. But what you still want to do with the time factor? Isolate the job, and give the least paid employee to compensate? The difficult jobs (read time consumiming), I give to the highest paid fitter.

So if you have multiple payrates, you labor is dependent upon who does the job, and oftentimes how they do it.

Your #2: To determine employee speed.
My fastest fitter does the least number of complete framejobs. I lean on him to do fix-its, rushes, and other odd-items. As such, ends up with less orders from the job stack.

Or lets put it in produciton terms. We just did a large job. While they were fitting it, I was informally tracking production, but the fitters wanted to compare too.

At the end of an hour, one guy had 30 frames on his table, the other had 22 or 24 (I really didn't count).
The one with 22 or 24 had corners, cert, and numbers on the corners.
The one with 30 had no corners or numbers.

What is "finished?" When do you start and stop the clock?

# 3: Can't you do that now? Basic accounting will give those results, with numbers you already have?

#4 It comes back to (us) knowing more about your shop, and then knowing how to get the clearest picture.

I'll give you an example from a different aspect of shop management. I was having a conversation with an old friend the other day about the different theft methods, as well as theft detection.
All vary by the systems used in the shop. If I know the shop structure, then I know the loss points, and theft strategies.
With potential points located, then you can look at detection.

So the short of it is: What kind of shop do you have. What knid of work do you do? What kind of work do you want to do? How are you structuring your work, and lobor force? How do you process orders? What data are you collecting now? How do you collect it?

You get the idea.
 

Bob Carter

SPFG, Supreme Picture Framing God
Hi Bearcat-I don't think the answer you are looking for is forthcoming. So my suggestion is to sit down with your CPA, tell him your concerns, have him create a Pro Forma P/L or Statement of Income that provides the answer you seek.

I suspect that he will tell you there are simply too many variables to get the empirical answer you want.

But I do agree that you need to understand all the components discussed. Labor (an expense) is certainly crucial and needs to be factored in determining our selling price. You just don't do it in the Cost of Goods.

Consult your CPA
 
Sponsor Wanted
Top