May 27, 2024

You’re the Boss Blog: Running the Numbers: Making Sense of Our Costs

Staying Alive

The struggles of a business trying to survive.

I’m continuing my series of posts detailing how much it cost to run my business in 2011 and looking for conclusions that can be drawn from those figures. Thursday, I discussed some numbers associated with our shop-floor productivity, and what we had done to improve it. In this post, I’m going to outline the costs that go into our products.

Cost of Good Sold

We take a somewhat unconventional approach to tabulating our cost of goods sold. I’ve never been one to take an inventory at the end of each year – most of what you might consider inventory actually consists of the thousands of scraps of wood that litter our shop. It would be nearly impossible to measure all of it and assign a value to it. It would also be a huge waste of scarce labor.

We also skip placing a value on our work in progress. To do that we’d need to know exactly how far along each project had progressed, but in reality that’s hard to say until we’re done. So we just consider our inventory value to be zero.

Another convention I’ve thrown out the window is separating our sales and production costs. In our work flow, the act of designing the product is an integral part of both selling and producing it. And our sales people are doing the designing. So their costs get put into cost of goods sold along with those for the shop floor guys.

With that in mind, our total cost of goods sold for 2011 was $1,265,307, or 59.9 percent of sales. By far the largest component of these costs was labor, which totaled $737,221. (I’ll be talking about labor in more detail in the next post.)

If you walk onto our shop floor, you will see wood everywhere. About a third of our floor space is taken up with stacks of lumber and veneer, and we have a plywood rack that runs along 40 feet of one wall. On closer inspection, you’ll also notice four large rolling rubbish bins full of scrap. That’s waste, and we generate a lot of it (which I have written about before). What’s surprising is that it is a relatively small portion of our costs.

The total bill for the materials that went into our tables was $350,035. That included things like glue, hardware and power/data units that did not generate any scrap. The stuff that was not used as efficiently, like plywoods, veneers and lumber, cost $221,484. Unfortunately, the wood we buy and the tables we make do not come in predictable sizes. I count on my shop-floor workers to make reasonable decisions to keep waste to a minimum. The labor costs involved with keeping track of every scrap would be very large.

We used lots of stuff to make tables that was not incorporated into the finished product, like sandpaper and material for jigs and fixtures. These things cost us $65,201. Shipping cost us $84,891, including $19,767 in supplies to make crates and $64,481 for trucking. If our clients were close to the shop, we delivered and assembled the tables ourselves. When they were too far away, we hired installers to do it. This cost us $27,958.


The factory consists of a small office and a large shop, 35,000 square feet in total. Rent cost me $113,590 for the year. My electric bill was $43,595 because we have lots of lights and lots of machines, and we air-condition the shop in the summer. Heat was cheaper, even though we run huge fans in our finishing shop that constantly throw hot air out the window. That bill was $6,580. So providing a place to work cost me $163,765.

Our marketing expense was $125,545. Of that, AdWords cost $109,613. The rest went for Web site upgrades and Web hosting. Insurance cost $17,449, including $12,114 for workman’s compensation. We spent $14,429 on office stuff, including new computers and software. That includes our Internet service. I spent only $360 on office furniture. We spent $11,641 on building and equipment repairs (upgrading wiring and fixing busted machines). Telephone services cost me $9,769, but that included $3,547 for 10 new phones and a multiplexing switch. Traveling to clients was $6,497. We spent $10,436 to keep our truck gassed and running. And I paid Paychex $4,704 to do our payroll (well worth it, in my opinion.)

I’ve omitted the costs of the machinery and fixtures because most of them were bought and depreciated long ago. I don’t have a total for all of that at hand, but a reasonable guess is that it would cost $600,000 to replace everything in the shop. The only major machinery expense we had last year was a new sander, which I purchased for $21,600 and then spent another couple of thousand dollars tuning up. I also replaced some computers at a cost of $7,387.55

Total expenses, omitting my pay, were $505,934. There were 254 working days in 2011, which means overhead cost me $1,991 per day. The total cost of running the shop — including cost of goods sold and overhead but omitting my pay — was $6,973 per day, or $871 per hour. When we divide the overhead by the number of hours worked, 20,333, we find that it cost $24.88 per labor hour.

Conclusion: I could spend a lot of time micromanaging all of these expenses, but until recently that wasn’t an option. Now that I am easing myself out of selling, I will take a careful look to see if any of them can be minimized. Where do you think I should start?

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside of Philadelphia.

Article source:

Speak Your Mind