Category Archives: Shop Rates

Classification Of Costs – Fixed and Variable Costs

There are many facets of costing and breaking costing into these four categories helps in understanding

  • Fixed and Variable Costs
  • Direct and Indirect Costs

Costs are generally classified as to whether or not they vary with the quantity of parts being manufactured.  Many times this can be described as a Setup Cost because it does not vary with the quantity of parts being manufactured. In manufacturing this can be setup costs, travel costs, staging costs, etc.   The other type of fixed costs would be rental space,  insurance, administrative salaries which do not change based on the quantity of parts being produced.

Variable costs are more directly related to the quantity of product being produced like material and labor costs.  Both material and labor costs are increased with the amount of product being produced.  Other type of variable costs are electricity, consumables like welding supplies, heating and even possibly maintenance tasks that must take place every x parts being produced.

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Engineering Costs

Engineering costs for many years have basically been included in the standard burden rate of the shop.  There are many situations now in this world where manufacturing is very competitive and technical that the standard burden rate of the shop cannot include all the costs associated with the engineering costs.

Direct Engineering Costs

Direct engineering costs would include things like design work, engineering, prototyping, testing and tooling design work.  Many job shops today have become turnkey where they don’t produce just a single small widget which is easy and simple to engineer, cost and manufacture.  On the other hand the jobs that manufacturing companies are required to produce can be very extensive including everything from a small box to an entire machine tool made up of of 100’s or even 1000’s of components.   The costs associated with doing the initial engineering can be very extensive and rightly so.  Many job shops have CNC machinery and during the estimating process to arrive at the most accurate costs they actually program and sometimes even manufacture the prototype.

Indirect Engineering Costs

Indirect engineering costs include computers, software and man power required to assist in manufacturing the product.  The costs of these indirect engineering items can be extensive and should be allocated across the job that uses these tools.

MIE Solutions provides software resources to help you manage your direct and indirect labor throughout the product life cycle from quoting and estimating, job costing to invoicing.

MIE Solutions Estimating Software

Material Estimating

Material estimating can be simple to complex depending on the particular job you are estimating.   Raw material is a commodity which could include metal sheets, wood, bars, plastic, plates, block of metal, etc.  These items are purchased from a supplier and are usually priced at a per unit weight price.

A few examples

1. When the raw material is priced as a per unit weight the estimated costs at the high level is

( Part Weight ) * (Price Per Unit Weight)

2. When the raw material is priced per unit. An example would be the supplier would price a 48 x 120 piece of plywood at $22.00

(Units Required) * (Price Per Unit)

3. The raw material may be priced per linear length, example wood be a tube would be priced at $2.00 per linear foot.

(Part Length) * (Linear Length Price)

The supplier would potentially have a Price Per Unit Weight, Price Per Unit or Linear Length Price that would fluctuate based on the quantity being purchased.  In this case the supplier would give prices as shown in the example

Weight           Price Per LB

0                       $1.00

1000               $0.80

5000               $0.65

10000             $0.61


As shown above you need to know the Part Weight, Unit Required and or Part Length.   Next you need to know the price that will be charged from the supplier and you will have the cost.

In the next blog entry the calculation of Part Weight will be discussed.

MIE Solutions provides software resources to help you manage your direct and indirect labor throughout the product life cycle from quoting and estimating, job costing to invoicing.

Direct Labor Costs

Direct labor costs are those costs which are performed during the production of some product.  The product can be any type of item from a machined part, computer and vehicle.  Labor is required to change a raw material into a product that may be sold or given away.  Direct labor is calculated by taking the direct time a product takes to create multiplied by the rate charged per hour by the processes.  The direct labor may actually be multiple steps on the production of the product. The total direct labor is  the sum of all the labor at the various steps during the creation of the product.  There are many examples of those that provide direct labor including Laser operators, CNC operators, Machine Shop operators, sheet metal workers, wood workers and many others.  You may think that direct labor is just the individual rate that you pay the employee but there is much more to it.  An employee has benefits including health insurance, sick days, vacation pay, FICA and other fees.  Adding up all the fees makes the hourly rate considerably higher than the hourly pay of the employee.

MIE Solutions provides software resources to help you manage your direct and indirect labor throughout the product lifecycle from quoting and estimating, job costing to invoicing.


Manufacturing Costs

Manufacturing costs consist of multiple elements which arrive at the full cost.  When estimating a product to be manufactured the entire costs are distributed between the following elements.

Material Costs – This includes both raw material which is reshaped, formed, etc to produce the item and purchased prefabricated items like nuts, bolts, screws.  Raw material would be considered commodity items in which the costs may fluctuate widely.

Labor Costs – This includes the wages of the employee’s actually manufacturing the product.

Labor Overhead – This includes the overhead of the employee’s which include benefits.

Machine Costs – This includes the costs of running the equipment and machines to product the product.

Engineering Costs – This includes the costs like prototyping, testing, etc.

Burden – This includes all the other costs not included in the above.

An ERP software system should report all these costs in an easy to read format so the manufacturer can operate profitable.   Look for an ERP package like MIE Trak from MIE Solutions which is a ERP software for manufacturers.

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Fixed and Variable Costs

There are two main types of cost which are Fixed or Variable costs.  If something is being manufactured it consists of both fixed and variable costs.  Fixed costs are those cost that do not change based on a quantity.  That basically means the cost is fixed if you product 1 or 1000 pieces.  Some of these costs would be security, taxes, insurance and administration costs.   These costs are called Fixed because they do not vary with the quantity being manufactured or the level of production.  Variable costs do vary based on quantity and level of production.  Some examples of variable costs are direct material and direct labor costs.

There is a third category of fixed and variable costs which is often referred to as mixed costs.  Mixed costs are simple costs that are part variable and part fixed.  Example would be a heating oil or gas, there is a fixed amount that would be used regardless if the machines are running just to keep the building warm.   The variable costs would be the amount of oil consumed by the machine.

MIE Solutions provides a great solution to manage and organize all the costs required including both fixed and variable costs.

Try this estimating software.


Job Costing Software

Job Costing has been around for many years to determine the cost of manufacturing a given product.  The process by which the expenses are record is costing.  Job costing software should make the process of recording the transaction simpler and not more difficult and time consuming.  Job costing software is not like cost accounting because it does not incur the situation of debit-credit transactions.  Job costing does use the same data to determine profitability and to evaluate all the cost of manufacturing the product.   Here are a few purposes which may help you determine the need for a proper job costing software package.

1. To determine the actual costs of the manufactured item.

2. To determine the total costs of all the components of a manufactured item.

3. To determine the standard price of the product

4. To determine the selling price of a the product which would include profit above the actual costs.

5. To determine feasibility of manufacturing the product at a profit

6. To evaluate the accuracy of estimates.  This is after the fact and the goal is to match or better the estimate cost.

7. To determine which components should be purchased versus those to be manufactured.  In the day and age of outsourcing it may be more cost effective to purchase some parts.

8. To compare the costs of manufacturing the item with different processes.

Costing is an essential component to the manufacturing processes because without it you would be waiting until the end of the month to see if you were profitable.  Also, you would not know what jobs were profitable versus the losers.

Try this estimating software.