Don’t Forget About G&A and Your Profit!
Feb 27, 2014
Last week I talked about my client who had a change in his sales volume and was wondering if he whether or not he should take on an additional low margin job. If you read my blog, you know that I said he most likely should take on the job. However, the real question (in many of these cases) is, how does general and administrative expenses and profits figure in to the overall job costing process?
There really are two distinct alternatives here. Option one, when businesses develop their quotes based on variable cost only and then apply a standard percentage for G&A and profitability. When a business like my client’s receives a request for quotation, they develop the direct costs of production. Then figure out what the cost would be and finally determine the selling price by adding on a factor for overhead and profitability. This is based on recent volumes the company has been experiencing and it’s standard application rate for G&A and profitability.
Option two would be when businesses attempt to do all of their quotes based on a fully loaded rate which already includes G&A and profitability built-in to the quote rate. In this case the rate is presumed in some relationship to the activity level anticipated for the year and built right in to the labor rates or machine rates so that it is recovered along with the profit factor that’s part of every quote when it’s being issued. So in effect, developing the cost by using this method is also concurrently developing the selling price because the profitability and the G&A recovery is built right into the rates.
Neither way is necessarily better than the other, it depends on your operation and what your end goal is. Regardless, general and administrative expenses, as well as profit, are very real and important to your business. If you do not consider these in your quoting you may be covering your direct costs, but without covering all of your costs and maintaining some profit you are only asking for trouble.
Categories: Cost Accounting