( read )

How Knowing Your Actual Costs Can Influence Your Business Decisions?

By Sean M. Hugo, CPA

I recently took a very interesting continuing professional education class recently over job costing.  The instructor was going over all the items that go into the costs of one hour of an employees time.  She then showed a picture of a ladder that a remodel crew had left behind at her house and said she called the contractor to let them know they left the ladder and they said the would swing by and pick it up.  Well they never came to pick up the ladder the instructor then asked the class the following question.  Should the contractor come to pick up the ladder?  This was a difficult questions to answer because we didn't know all the contractors costs and how much each hour of time costs the contractor and how far they would have to drive to pick up the ladder, etc.  Let's assume the following

  • The contractor  time or his employees time would cost a minimum $45 hours
  • The contractor has an opportunity cost of $75 per hour. 
  • Assume it would cost $50 to replace the ladder. 
  • Assume it would take one hour to pick-up the ladder from stopping at one job going to pick-up the ladder and getting back to work on another job.

What should the contractor do? 

I think most people's gut reaction is to say go pick-up the ladder it will save you $50 because you will not have to go buy another one.  Under this scenario the contractor will have a hard cost of $45 to pick-up the ladder but will give up $75 in additional revenue that could be earned if that time was spent working on a project.  Assuming the contractor is booked up time wise it would appear the contractor would be better off not picking up the ladder.  What some people may argue is well if you don't pick up the old ladder you are going to have to spend time going to buy a new ladder which is a great point because there will be a cost involved with that as well.  To that I would say it would better to not pick up the ladder assuming the contractor is going to have to go to a hardware story anyway to pickup other supplies so there would not have to be a special trip just to pick up a new ladder. 

Businesses that have detailed accounting and job costing records can make these types of business decisions the businesses that don't have to hope they guess right on what to do.  Which are you?