Page 28 - MetalForming June 2015

A Quote is Only
as Good as Its
Calculations
Drill down into your operations to accurately ascertain the right costs, then use these costs correctly to produce real-world quotes.
BY HARRY F. LANDSBURG
Manufacturers must use the best method of costing jobs to quote competitively and grow the business profitably. Com- monly used assumptions about single factory rates and “free” equipment must be replaced. Calculating fully loaded labor rates, applying deprecia- tion costs to all working equipment, and correctly applying overhead to workcenters and operations are critical to making profit and growing business value.
It’s no secret that business is very competitive. Quoting that uses broad generalities and “rules of thumb” will not gain new customers nor more opportunities from existing customers. The business will succeed when the right costing methods and margins are used to quote winning orders.
Traditional Quoting Methods
The traditional method of costing
Harry F. Landsburg is director of busi- ness process technology at Delaware Valley Industrial Resource Center, Philadelphia PA; www.dvirc.org.
parts was based on the average hourly direct-labor rate and then increasing that value with several overhead per- centages. These company-wide calcu- lations included adding percentages for employee benefits, manufacturing over- head and selling/general/administra- tive overhead. This method, while often mathematically correct, proves ineffec- tive in accurately costing the operations required to produce each part.
All direct-labor employees are rarely paid the same and all parts are not produced using the same routings or series of operations. So why use quote rates with those assumptions? Making the right calculations to develop accu- rate cost rates and managing markup decisions at the net-income level are the best ways to win jobs.
Adding three large amounts of over- head cost also is misleading as all employees do not have the same over- head costs. CNC equipment costs more than welding equipment and uses more energy. More advertising and selling focus may be required for newer parts or products while jobs/parts made for many years have less selling resources directed toward them. This logical vari- ation does not support the company-
wide rates and large overhead per- centages used by many manufactur- ers to quote work.
Get More Specific in Calculating Costs
The more specific you can be with calculating cost and assigning overhead to the correct operations, the better your cost rates will be and the more compet- itive your quoting will become. Consid- er measuring and using the best possible costs for each manufacturing process.
Don’t increase the labor rates of your direct-labor employees with a general percentage of employee overhead. Be more specific about which employees work in each workcenter. For each employee, add to his/her base labor rate the company’s cost for:
• FICA insurance;
• State and Federal unemployment taxes;
• Workers compensation;
• Insurances—health, dental, group term life;
• Holiday, personal and vacation days off; and
• Other costs (uniforms, education, etc.) that apply to each employee.
You also can calculate the full cost of overtime by adding to the fully loaded labor rate an additional 50 percent of the base labor rate and the associated
26 MetalForming/June 2015
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