Wize University Managerial Accounting Textbook > Pricing
Time-and-Material Pricing
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Time-and-Material Pricing
Time and material pricing is technique used by service providers that have a high material component in their service, like car mechanics and general contractors.
Labour Rate
The labour rate is the rate charged by hour of labour and must be sufficient to pay for all time charges as well as generate the desired profit per hour.
Time Charges
All costs related to the labour component of the service, this includes but is not limited to:
- Technicians wages and benefits
- Overhead attributable to the management of labour
Material Loading Percentage
The material loading percentage is the mark-up used when pricing the cost of the materials. It must be sufficient to pay for all additional costs related to the materials.
Material Charges
All costs related to the use and management of materials, this includes but is not limited to:
- Shipping and handling
- Storage cost
- Other overhead attributed to the management of materials
Watch Out!
In the formula, DO NOT include the actual cost of materials in the numerator.
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Example: Time-and-Material Pricing
Auto Primo specializes in the repair and maintenance of high-end sports cars. Initial estimates for the upcoming year are the following:
Time Charges
$600,000 for mechanics wages and benefits
$150,000 for mechanic supervisor wages and benefits
$100,000 for related overhead
Material Charges
$2,000,000 for parts
$200,000 for delivery of parts
$300,000 for storage and inventory management
$150,000 for related overhead
Management expects a total of 8,000 labour hours will be worked in 2020 and wishes to earn a profit of $90 per labour hour and 75% on parts.
Instructions
1. Compute the labour rate
2. Compute the material loading percentage
3. Estimate the cost of repairing a customer's Ferrari. The repair will take 11 hours and will require parts costing $30,000.
Practice: Time-and-Material Pricing
XYZ Services repairs commercial ventilation equipment. The following budgeted cost data is available for 2020:
XYZ has budgeted for 10,000 hours of technician time during the coming year. It desires a $64 profit margin per hour of labour and a 50% profit margin on parts.
The company will charge $ per hour.
The company will mark-up the cost of materials by %.
A customer wishes to have a commercial air distributor repaired, XYZ estimates that it will take 20 hours of labour and $8,000 in materials, the invoice price they will charge the customer is $.