Calculating Cost Per Hour of Factory Op

[vonsteimel]

Greetings,
I've been doing some finance calculations to help project the cost/margins.etc of operations & projects. We're a small factory making recreation vehicles by hand.

First I've added up all expenses (excluding materials used for production) for a given month. This includes utilities, landscaping, wages, insurance, taxes.etc -- This gives a total cost (per month) of what it takes to keep the doors open regardless of what we are producing (this is why I've excluded materials) -- lets say $50k/month.

Then I've added up all of the employees -- lets say 20 people.

I then added up the total number of hours paid out for the month -- lets say 3000 hrs.

So... $50,000/3000hrs = $16.70 per hour, per person. This means everyone needs to produce at least $16.70 of value per hour (on avg) to keep the doors open. However...

Since we have a large spectrum of tasks which must be accomplished for success (shipping, sales, marketing, drafting, payroll, planning, site maintenance.etc) many of the employees are busy doing these tasks which cannot produce straight-forward value. (although just as important)They are merely "supporting" those on the production lines.

So of 20 employees, say only 12 are in the factory capable of producing value -- The other 8 are in the office supporting those in the factory. So to get a real cost-per-hour...

3000hrs a month / 20 employees = 150 hrs per person, per month ->
150hr per person X 12 production employees = 1800 hours of value-adding work per month.

So again: $50,000/1800hrs = $27.78 per hour, per person must be made in the factory to keep the doors open.
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This gives a more accurate cost-per-hour to use when calculating the margins required to successfully setup separate operations & projects. -- It also provides a more accurate "cost" when determining an hourly-rate to charge for service work.

My question is: What do you think of the calculations made above? Which way is best for determining cost per hour of running a production business? What is a better way to do it? How is it best to calculate service-rates?

This is the real-life situation I am facing... I am a Mechanical Engineer by training but have been pulled into planning & finances to fill in the gaps of our business. What do you think. Any suggestions will be greatly appreciated.
Thank you,
VS

 

[IRstuff]

The thrust is basically correct. We used a "wrap rate" that's a multiplier on the base salary for direct charging employees that accounts for the overhead employees, lights, etc. However, I'm unclear whether each, and every one, of the 1800 hrs is really all going to contracted work. Are there no meetings? No lost time? These need to generally be factored in.

Which is OK, when you're telling a customer why you're charging him whatever it is.

At the business end, though, SOMEONE needs to bring in $50k+margin to pay for everyone in the plant, which is a whole different metric.

TTFN

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[KENAT]

I had to take an accounting class at university as part of my Engineering Degree and this was one of the situations covered.

In essence there are a range of ways you can do it, and which is most appropriate will vary based on various factors such as how you are paid/earn you money (fixed rate, hourly, for finished product...), how your competitors do things (that doesn't mean you have to do it the same but if you come up with a way that makes you more expensive you need to look again).

Your second approach is getting better but may still be a bit simplistic as IRstuff suggests.

One thing to consider is the 'outsourcing conundrum' that can come from reducing workers that directly charge their time so then at least proportionately increasing your over head rate (same or more overhead divided by fewer and fewer direct bookers). As such a simplistic division of all over head across all direct bookers may not be appropriate.

It may actually be appropriate to use something other than labor hours to do your costing, one example I think I did at uni actually based it on production floor area or something.

If you're going into this much detail you should probably look at some more formal resources on this kind of thing, at the least a good book.

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[jake56]

vonsteimel, I would like to talk to you regarding your work on 30" ducted fans, if I can contact you , please let me know.

JM