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.
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Company Overhead Absorption Rate
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Work Center Overhead Absorption Rate
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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 CostsBelow you will find an example of a ficticious company and its associated budgeted costs.Direct Materials.........................................$1,500,000Direct Labor.................................................$400,000Indirect 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.............................$1,040,000Sales Commissions.....................................$200,000Advertising..................................................$20,000Machine HoursAssuming an 8 hour day, 5 days a week with working 52 weeks a year you would getHours per Day...............................................8Hours per Week.............................................40Hours per Year..............................................2080Hours Per Year for 10 Machines.....................20,800There 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 = $50Is this what you want to use for your quoting hourly shop rate?
Now, as the world is getting back on track to some extent after the global pandemic, the industries are trying to regain the momentum they lost in that period, including the manufacturing sector.
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Manufacturers have to work with several inefficient, disjointed systems that are not integrated resulting in manual and duplicate data entry, time delays, miss-messaging, and lost revenue opportunities due to mis-collaboration.
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