Page 30 - MetalForming June 2015

A Quote is Only as Good as Its Calculations
general and administrative overhead allows the person developing fully loaded cost rates to increase the fully loaded labor rate by the hourly cost of the three example overhead categories.
When a category of allocated over- head cost has been totaled, divide that result by the number of direct-labor hours recorded by the business for the period of time that the costs apply. Divide a year of overhead cost by a
year of direct-labor hours, including straight-time and overtime hours.
The hours worked by all employees who specifically produce parts sold in the business are used to divide into the overhead cost totals by category. Include the direct-labor hours of all factory employees based on how you categorize them. For some businesses, this includes the hours of all employees at each workcenter or operation. Costs
for materials handlers, nonworking supervisors and other indirect/man- agement employees often are identified as overhead cost. Do not include the hours that the indirect employees work in the hours divided into the overhead cost by category.
Once identifying all of the overhead costs by overhead category, divide the result by total direct-labor hours to present an hourly overhead rate per overhead category.
Fully Loaded Workcenter Rates
Fully loaded workcenter rates are the combination of the fully loaded labor rate, the equipment deprecia- tion rate and the overhead rates for manufacturing, selling, and general and administrative overhead. Use these workcenter rates to cost the traveler operations required to make the parts sold by the company.
By using fully loaded workcenter rates, the person quoting needs to focus only on desired bottom-line profit and not a markup for gross margin. If a com- pany wants to make 10 percent bot- tom-line net income on a job, the total cost should be divided by 0.9 to calculate the selling price. This is a different but better approach to quoting than taking average direct-labor rate plus other direct costs and dividing by the gross margin reciprocal (35 percent gross mar- gin divided by 1.00-0.35, or 0.65).
The method suggested in this article has been shown to be effective at many manufacturing companies. It provides the best allocation of variable and fixed costs, and provides the most accurate workup of the cost of all manufacturing operations throughout the company. By using a calculated depreciation placeholder for fully depreciated equip- ment as part of the cost buildup, staff who quote an opportunity have at their disposal the best calculation of the full cost of producing the part. MF
Note: To view a sample calculation of fully loaded labor rates for a hypothet- ical metal fabricating company, read this article online at www.metalform- ingmagazine.com/magazine/archives/is- sue.asp?i=2015-6.
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28 MetalForming/June 2015
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