vonsteimel
Mechanical
- Oct 19, 2010
- 132
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.
------------------------------
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
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.
------------------------------
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