In my previous posts I have been discussing at length different types of costs including direct and indirect costs, direct and indirect material costs, direct and indirect labor costs and lastly burden. The next point is Markup Rate which is the key to making money.
Markup is the amount of profit that is made on a job which would also include the taxes made from that profit. There are a few different types of profit
Gross Profit includes earnings from ongoing product shipments after direct costs of goods sold has been subtracted from the sales revenue. That is a big mouthful but its basically what was your revenue minus what expenses your incurred while manufacturing that product. This must be positive or it is costing you more to manufacture the product then the actual direct costs of the product. A simple example is if you made a bracket and you sold the bracket for $5.00 but the raw material for the bracket was $6.00. In this case you are already upside down.
Net profit would is earnings subtracts all the miscellaneous expenses including indirect costs, administrative costs and taxes.
Markup would be higher then your operating profit and net profit but the true goal is to have Markup, Net Profit and Operating profit all to be positive
MIE Solutions has developed software to help manage and control your costs from estimating to shipping the product out the door.
Direct Burden Expenses
The are expenses that are not included in direct labor costs and material costs and these would be direct burden expenses. Direct costs are those costs directly involved in the manufacturing of a product. All other direct expenditures can be classified as direct burden expenses. These would include required fixtures, jigs,molds, etc that have not been included in direct engineering expense. Normally marketing, sales and shipping expenses would be indirect costs unless they are directed at a specific product. For example, if you are doing an advertising campaign for a specific product this expense would be an direct burden expense.
Indirect Burden Expense
All expenses except direct expenses are classified as indirect expenses. This would be administrative expenses, factory overhead expenses. Factory expenses can include many different items such as indirect material, indirect labor and indirect engineering costs which are not direct costs. The office or factory rent, utilities, insurance and equipment would all be categorized as indirect burden expenses.
There are many different types of indirect burden expenses which you should probably talk to your account to get a full list which you may be interested in.
MIE Trak ERP software is designed to capture these expenses in order to manage your job costs.
Direct and indirect costs are two more costs which are involved in running a business. Direct costs are those costs directly associated with the manufacturing or production of a product. This includes labor that is directly related to making the product and purchased materials which are directly related to making the product. Engineering costs can be applied directly to a product so they would be included in direct costs.
Indirect labor costs are those costs that cannot directly be related to the production of a specific product. These would include the basic overhead which is used in the production of all the different products at the company. Some examples would be rent, wages of supervisors and managers, office staff, electricity and power consumption, repair and maintenance costs and even consumables like gas, oils and lubricants.
In the world of manufacturing a software package which can handle direct and indirect costs is a must and software from MIE Solutions. This software can help your manufacturing company become more competitive and cost conscious.
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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