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.


Indirect Material Costs

Indirect material costs are those costs that are not directly added into the product.   There are many times materials required to manufacturer a part but those materials are not put into the product.  Examples of this situation are oils, lubricants for machines, sandpaper, molds and castings.   There are some situations where the molds and castings would be included into the direct material costs because they specific for the product.  When doing estimates in this way you have the choice of amortizing the mold and casting costs into the product or charge the customer separate as a one time charge.

Other possible indirect material costs are nuts, bolts, screws or inexpensive items.  Usually this would be added into the product causing those materials to be direct costs but there are situations depending on the product being manufactured where these type of items would be indirect costs.


Material Cost

Material cost is a big subject and will be handled in multiple blog entries.  Material costs are costs that directly go into producing the desired product.  Material costs can be divided into both direct and indirect material costs.  Direct costs are what we will be looking into because those costs are directly in the product.

Material can also be broken between raw materials which are commodities and other items which would include pre-manufactured “things” including nuts, bolts, screws, hard drives, memory chips, etc.  Raw materials dealing with commodities where their price may fluctuate daily is what we will deal with in the next few blogs entries.

Direct commodity material costs are those expenditures which can be allocated directly to the cost of the specific product.  Here is a basic outline of estimating the material cost

1. Catalog all the raw materials required from all the drawings.

2. Calculate the amount of material required for each cataloged raw material.

3. Total common materials, gauges and sizes to come up with total requirements

4. Sum all the weights with the requirements

5. Obtain supplier pricing

6. Total costs

This is just a high level summary of calculating material costs.  We will investigate calculating volumes, lengths and other type of raw material calculations.

MIE Solutions provides software resources to help you manage your direct and indirect costs 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.

Please visit us at   ERP From MIE Solutions

Direct and Indirect Costs

Fixed and Variable costs can now be broken down into two more cost types.  Direct and Indirect costs classify the costs of parts being manufactured and are critical to calculating shop overhead rates.  Direct costs are those costs that are directly associated with the production of the product.  Indirect costs are those costs which do not associate directly with the product being manufactured and cannot be determined for specific products.

Direct costs are attributed directly with the manufacturing of the product.  For example, if a product is manufactured out of metal, the metal of the product are direct costs.  The material used in the product being manufactured is specific for the given product and not shared among other products.  Examples would include all bill of material used to make the product including items such as metal, wood, plastic, nuts, bolts, screws, paint, etc.   Direct costs not only include the bill of material but also includes the direct labor of the craftsman making the product.  The direct labor costs and bill of material can be attributed directly to the manufacturing of the product.

Indirect costs on the other hand cannot be directly attributed to the manufacturing of the specific product.  Examples of indirect costs are rent, electricity, office space.  Employee’s not directly working on manufacturing of products is also considered indirect because those employee’s are not specifically involved with the production of the specific product.

In order to acquire a good estimate both direct and indirect costs should be added into the cost of producing and manufacturing the product.

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