Machine Shop Rates Part 1

Welcome to the MIE Solutions Job Shop Estimating  blog. MIE Solutions ERP system provides a comprehensive job shop software to deal with the many problems issues a job shop encounters.  Estimating has become a critical factor in many job shops in order to determine the best price for custom and made to order manufactured parts.

There are basically 3 ways to calculate overhead absorption rates which is used to provide your shop sell rate during quoting and estimating.

  1. Company Overhead Absorption Rate
  2. Work Center Overhead Absorption Rate
  3. Percentage Overhead Absorption Rate

Each of these three ways of calculating your overhead absorption has both positive’s and negatives.

Company Overhead Absorption Rate

A machine shop rate for a job shop manufacturer is not that difficult to compute once you have your income sheet calculations available.   Its important to calculate your shop rate for estimating accurately because if you are off by much you will be losing money continuously.

Budgeted Costs

Below you will find an example of a ficticious company and its associated budgeted costs.

Direct Materials…………………………………..$1,500,000

Direct Labor………………………………………….$400,000

Indirect Costs

Rent (Factory uses 80% of floorspace)……….$620,000

Utilities………………………………………………….$75,000

Salary For Production Supers………………….$300,000

Indirect Materials…………………………………..$45,000

Total Indirect Costs………………………..$1,040,000

Sales Commissions……………………………….$200,000

Advertising…………………………………………..$20,000

Machine Hours

Assuming an 8 hour day, 5 days a week with working 52 weeks a year you would get

Hours per Day………………………………………..8

Hours per Week………………………………………40

Hours per Year……………………………………….2080

Hours Per Year for 10 Machines…………………20,800

There are a lot of assumptions that are being made here which will be discussed in much more detail in future blogs but this is the simple case.

What is your budgeted overhead rate?  $1,040,000/20800 = $50

Is this what you want to use for your quoting hourly shop rate?  The answer is No

//www.mie-solutions.com

Leave a Comment