| This photo is in the public domain. |
This article appears in Sign Builder Illustrated.
By Jim Hingst
No one can afford to
make mistakes estimating a job. The difference between making the sale and not
making it often depends on correctly costing and pricing your work. Equally
important, you want to price your work so your business actually covers all of
its expenses as well as making a reasonable profit and not leaving any money on
the table.
make mistakes estimating a job. The difference between making the sale and not
making it often depends on correctly costing and pricing your work. Equally
important, you want to price your work so your business actually covers all of
its expenses as well as making a reasonable profit and not leaving any money on
the table.
While totaling the direct labor, direct material and other direct
costs for a job is easy, how do you allocate an appropriate amount of your
overhead costs to the project? How do you determine an hourly shop rate? With
so many methods for estimating jobs, which one is right for your business?
costs for a job is easy, how do you allocate an appropriate amount of your
overhead costs to the project? How do you determine an hourly shop rate? With
so many methods for estimating jobs, which one is right for your business?
The method that I advocate is one that I used as an estimator for
a large screen printer. It is one of the easiest and most popular ways for a
small or medium size shop to cost their jobs. This estimating procedure uses direct
labor as the cost driver for allocating an appropriate amount of your shop and
administrative costs to a project.
a large screen printer. It is one of the easiest and most popular ways for a
small or medium size shop to cost their jobs. This estimating procedure uses direct
labor as the cost driver for allocating an appropriate amount of your shop and
administrative costs to a project.
Before describing this estimating system, I need to explain some
basic cost accounting terms, beginning with direct costs, which are comprised
of three components:
basic cost accounting terms, beginning with direct costs, which are comprised
of three components:
● Direct Labor
● Direct Material
● Other Direct
Direct Labor Costs
Direct Labor. In discussions of labor costs, you
probably have heard many different terms used. Sometimes these terms are used
incorrectly. To avoid any confusion, let’s start with a few basic financial
definitions.
probably have heard many different terms used. Sometimes these terms are used
incorrectly. To avoid any confusion, let’s start with a few basic financial
definitions.
Direct labor refers to
the actual wages paid that you pay workers in your shop to complete a
particular activity in the production of a job. It typically only applies to
line workers and does not include any wages or salaries paid to supervisors or
office personnel.
the actual wages paid that you pay workers in your shop to complete a
particular activity in the production of a job. It typically only applies to
line workers and does not include any wages or salaries paid to supervisors or
office personnel.
Direct labor hours are
not considered part of your shop overhead. Direct labor usually does not
include any benefits, such as health insurance, dental insurance and payroll
taxes, nor does it factor in vacations, holidays or sick time. Instead, these
benefits should be categorized as part of the overhead (shop and administrative
costs).
not considered part of your shop overhead. Direct labor usually does not
include any benefits, such as health insurance, dental insurance and payroll
taxes, nor does it factor in vacations, holidays or sick time. Instead, these
benefits should be categorized as part of the overhead (shop and administrative
costs).
Direct labor only
applies to costs, which are directly traceable to a specific job. This can
include the time for machine set up, production time and clean up. It
would not include any time that your employee might spend during the course of
a normal day answering phones, speaking to walk-in customers, performing
housekeeping activities or routine maintenance on shop equipment.
applies to costs, which are directly traceable to a specific job. This can
include the time for machine set up, production time and clean up. It
would not include any time that your employee might spend during the course of
a normal day answering phones, speaking to walk-in customers, performing
housekeeping activities or routine maintenance on shop equipment.
As an example of
estimating direct labor costs for a job, you may determine that to
plotter cut, weed, premask and apply a graphic to a sign blank will take 1.25
hours at an average raw labor rate of $12 per hour for a total of $15.
estimating direct labor costs for a job, you may determine that to
plotter cut, weed, premask and apply a graphic to a sign blank will take 1.25
hours at an average raw labor rate of $12 per hour for a total of $15.
1.25 hours production
time x $12/hour = $15 direct labor cost
time x $12/hour = $15 direct labor cost
Indirect Labor. This refers to the number of labor hours
devoted to tasks other than production, such as performing machine maintenance,
clerical tasks or attending to customers. Whereas direct labor hours are not
part of shop overhead, indirect labor is. In a small sign shop, where employees
wear many different hats, as much as 40% of labor hours are indirect labor.
devoted to tasks other than production, such as performing machine maintenance,
clerical tasks or attending to customers. Whereas direct labor hours are not
part of shop overhead, indirect labor is. In a small sign shop, where employees
wear many different hats, as much as 40% of labor hours are indirect labor.
Burdened Labor. A fully burdened labor rate would include all of
the benefits, payroll taxes, insurance and any other employment costs that you
pay in addition to the employee’s wages to keep them on the job. This burdened
rate is not the same as an hourly shop rate, which uses direct labor hours as a
cost driver for allocating overhead expenses.
the benefits, payroll taxes, insurance and any other employment costs that you
pay in addition to the employee’s wages to keep them on the job. This burdened
rate is not the same as an hourly shop rate, which uses direct labor hours as a
cost driver for allocating overhead expenses.
Overhead Allocated to
Direct Labor. For a job shop, such as
a sign shop or printer, the simplest way to allocate overhead to your jobs is
to divide it evenly across the total number of direct labor hours. By
doing this, you will calculate your shop rate.
Direct Labor. For a job shop, such as
a sign shop or printer, the simplest way to allocate overhead to your jobs is
to divide it evenly across the total number of direct labor hours. By
doing this, you will calculate your shop rate.
If you decide to
allocate overhead costs to direct labor, which I recommend, you need to
estimate the number of hours that you and your employees will directly spend on
a job and multiply it by the hourly shop rate.
allocate overhead costs to direct labor, which I recommend, you need to
estimate the number of hours that you and your employees will directly spend on
a job and multiply it by the hourly shop rate.
Example:
5.75 total direct labor
hours X $50.00 hourly shop rate = $287.50 total labor cost
hours X $50.00 hourly shop rate = $287.50 total labor cost
Determining your shop
rate is covered in detail later in this article.
rate is covered in detail later in this article.
Direct Material Costs
Direct Material refers
to the raw material estimated to produce a job. When I worked for fleet
graphics screen printers, these materials included the cost of the vinyl
film, the ink, clear coat and the premask (application tape).
to the raw material estimated to produce a job. When I worked for fleet
graphics screen printers, these materials included the cost of the vinyl
film, the ink, clear coat and the premask (application tape).
In estimating the
materials needed, you should always factor in a percentage for material loss or
scrap. For many jobs, an additional 10% may cover your scrap rate. That
percentage, however, could be higher depending on the difficulty involved in
producing the job.
materials needed, you should always factor in a percentage for material loss or
scrap. For many jobs, an additional 10% may cover your scrap rate. That
percentage, however, could be higher depending on the difficulty involved in
producing the job.
For example, if a screen
printer is printing a halftone or 4-color process job, the scrap rate is
usually much higher, perhaps as high as 25%. You may also need to include
additional material that is required for progressive proofs.
printer is printing a halftone or 4-color process job, the scrap rate is
usually much higher, perhaps as high as 25%. You may also need to include
additional material that is required for progressive proofs.
Other Direct Costs
Other Direct refers to any additional costs for tooling, materials
or services, which are required to produce a specific job. In screen printing,
other direct costs could include the cost for dies, color separations or design
services. In sign making, other direct could include any special paint or tools
that you would only use on the job it was ordered for. It might also include
any part of the production costs that you need to farm out to another company.
or services, which are required to produce a specific job. In screen printing,
other direct costs could include the cost for dies, color separations or design
services. In sign making, other direct could include any special paint or tools
that you would only use on the job it was ordered for. It might also include
any part of the production costs that you need to farm out to another company.
Cost of Goods Sold
In discussions of accounting and estimating, one of the terms that
you will frequently encounter is “Cost Of Goods Sold” (COGS). For a job shop, such as a sign business,
digital printer or screen printer, cost of goods sold simply refers to all of
the direct costs that are charged to a specific job. These direct costs
include:
you will frequently encounter is “Cost Of Goods Sold” (COGS). For a job shop, such as a sign business,
digital printer or screen printer, cost of goods sold simply refers to all of
the direct costs that are charged to a specific job. These direct costs
include:
● Direct Material;
● Direct Labor; and
● Other Direct Expenses.
NOTE: Cost of Goods Sold
(COGS) and Cost of Sales (COS) are frequently used interchangeably. However,
manufacturers, such as sign shops and printers, often use the term COGS.
Retailers, on the other hand, frequently use COS.
(COGS) and Cost of Sales (COS) are frequently used interchangeably. However,
manufacturers, such as sign shops and printers, often use the term COGS.
Retailers, on the other hand, frequently use COS.
Cost of Goods Sold only includes direct costs, but does not
include any indirect costs. In costing any services, such as application of
vehicle graphics, COGS typically just includes direct labor cost.
include any indirect costs. In costing any services, such as application of
vehicle graphics, COGS typically just includes direct labor cost.
Comparing the COGS to revenue ratio (in other words, the
percentage of your direct costs to your sales) is relevant to a shop owner or
manager in the following ways:
percentage of your direct costs to your sales) is relevant to a shop owner or
manager in the following ways:
● It indicates how well you are buying your raw materials and
controlling your labor costs;
controlling your labor costs;
● It reveals how much money you have available in the job to cover
your shop and administrative costs; (in challenging times, this comparison may
provide you with the justification to take on some larger, low risk projects to
cover shop overhead); and
your shop and administrative costs; (in challenging times, this comparison may
provide you with the justification to take on some larger, low risk projects to
cover shop overhead); and
● It helps in calculating your shop’s gross margin for a select
period of time.
period of time.
For a small business, such as a sign shop, a desirable COGS to
Revenue Ratio is typically 20%. For a larger shop or business in a different
market an acceptable ratio could be much higher.
Revenue Ratio is typically 20%. For a larger shop or business in a different
market an acceptable ratio could be much higher.
Applying a Burden Rate to Material Costs and
Other Direct Expenses
Other Direct Expenses
Because direct labor is
related to every aspect of indirect costs, it is an effective cost driver for
allocating overhead to jobs. However, what happens when you are just buying and
selling material and services and no direct labor is charged to a job? No
overhead is allocated.
related to every aspect of indirect costs, it is an effective cost driver for
allocating overhead to jobs. However, what happens when you are just buying and
selling material and services and no direct labor is charged to a job? No
overhead is allocated.
In addition to
allocating a portion of overhead costs to direct labor costs, you should also
apply a burden rate to raw material costs and Other Direct expenses. A “burden
rate” is another term for allocating or applying a percentage of indirect costs
or overhead to the direct costs of a job.
allocating a portion of overhead costs to direct labor costs, you should also
apply a burden rate to raw material costs and Other Direct expenses. A “burden
rate” is another term for allocating or applying a percentage of indirect costs
or overhead to the direct costs of a job.
In the case of assigning
a burden rate to direct material and other direct costs, many shops will apply
10% to these costs. For example, if the raw material cost including a
percentage for scrap (vinyl film, ink, laminate and application tape) is
$100.00, an additional 10% burden rate (calculated by dividing by .9) would
result in a burdened material cost of $111.11
a burden rate to direct material and other direct costs, many shops will apply
10% to these costs. For example, if the raw material cost including a
percentage for scrap (vinyl film, ink, laminate and application tape) is
$100.00, an additional 10% burden rate (calculated by dividing by .9) would
result in a burdened material cost of $111.11
Applying a burden rate
to direct material and other direct cost, will allocate a rightful amount of
overhead to jobs in which you are merely buying material, such as striping, or outsourcing
a service, such as vinyl application, and reselling these products or services.
(NOTE: After burdening these products and services, you still need to factor in
the profit margin for the job.)
to direct material and other direct cost, will allocate a rightful amount of
overhead to jobs in which you are merely buying material, such as striping, or outsourcing
a service, such as vinyl application, and reselling these products or services.
(NOTE: After burdening these products and services, you still need to factor in
the profit margin for the job.)
Indirect Costs
Indirect costs are those
expenditures, which are not directly traceable to a job, and consequently not
directly charged to the manufacturing of a project. Nevertheless, a fair amount
of those indirect costs must be apportioned to the job.
expenditures, which are not directly traceable to a job, and consequently not
directly charged to the manufacturing of a project. Nevertheless, a fair amount
of those indirect costs must be apportioned to the job.
Some examples of
indirect costs are shop overhead, advertising expense, supervisor salaries and
taxes. Indirect costs can also include direct material expenditures for
supplies, which are impractical to trace to a specific projects, such as
screws, glue or lettering enamel. In these cases, it makes more sense to treat
charges for these materials as part of shop overhead.
indirect costs are shop overhead, advertising expense, supervisor salaries and
taxes. Indirect costs can also include direct material expenditures for
supplies, which are impractical to trace to a specific projects, such as
screws, glue or lettering enamel. In these cases, it makes more sense to treat
charges for these materials as part of shop overhead.
Calculating direct costs
that apply to a specific project is the easy part of estimating. These
calculations are fairly cut and dry. What can complicate costing is how you
allocate indirect expenses or overhead to the cost of a product. Estimators
have devised many different methods for doing this. Some methods are better
than others.
that apply to a specific project is the easy part of estimating. These
calculations are fairly cut and dry. What can complicate costing is how you
allocate indirect expenses or overhead to the cost of a product. Estimators
have devised many different methods for doing this. Some methods are better
than others.
If you were making just
one product, such as printing one type of T-shirt, allocation of overhead would
be very easy because you could merely divide all of your shop and
administrative expenses by the number of products produced within a specified period.
The amount of overhead allocated to each product would be the same.
one product, such as printing one type of T-shirt, allocation of overhead would
be very easy because you could merely divide all of your shop and
administrative expenses by the number of products produced within a specified period.
The amount of overhead allocated to each product would be the same.
Estimating for a job
shop, such as a sign business or a digital printer, is not so cut and dry,
because direct costs vary from one job to the next. Production of sign A might
have $1000 in direct costs, whereas sign B might have $50 in direct costs. If
both projects share the same amount of overhead, does this make sense?
shop, such as a sign business or a digital printer, is not so cut and dry,
because direct costs vary from one job to the next. Production of sign A might
have $1000 in direct costs, whereas sign B might have $50 in direct costs. If
both projects share the same amount of overhead, does this make sense?
Suppose that that equally
shared amount of overhead is $50. That would make the cost of sign A $1050 and
the cost of sign B $100, even before we factor in our profit margin. In this
example, allocating the same amount of overhead to each project would
ultimately result in one product being underpriced while the other would be
overpriced.
shared amount of overhead is $50. That would make the cost of sign A $1050 and
the cost of sign B $100, even before we factor in our profit margin. In this
example, allocating the same amount of overhead to each project would
ultimately result in one product being underpriced while the other would be
overpriced.
Graphics projects are
typically comprised of several different parts. For example, a vehicle graphics
design usually includes several different design elements, including a logo,
company name, a slogan, striping and a phone number. You must estimate the cost
for each of these individual parts.
typically comprised of several different parts. For example, a vehicle graphics
design usually includes several different design elements, including a logo,
company name, a slogan, striping and a phone number. You must estimate the cost
for each of these individual parts.
SUGGESTION: When you present pricing to your prospects, do not provide an
itemized cost for the parts. This only encourages your prospect to shop the
prices of the parts. Only present a total price for the project.
itemized cost for the parts. This only encourages your prospect to shop the
prices of the parts. Only present a total price for the project.
The cost of each part is
comprised of direct costs and indirect costs. Direct costs consist of direct
labor, direct materials and other direct. Direct costs are expenses that are
directly traceable to the job. In the case of direct material, these expenses
could include the cost of vinyl, substrate such as aluminum composite material
and extrusions. Supplies, which are difficult or impossible to estimate in the
production of job, such as screws or glue, are typically classified as another
indirect cost. In the case of digital printing, it could include the cost of
ink.
comprised of direct costs and indirect costs. Direct costs consist of direct
labor, direct materials and other direct. Direct costs are expenses that are
directly traceable to the job. In the case of direct material, these expenses
could include the cost of vinyl, substrate such as aluminum composite material
and extrusions. Supplies, which are difficult or impossible to estimate in the
production of job, such as screws or glue, are typically classified as another
indirect cost. In the case of digital printing, it could include the cost of
ink.
Indirect costs include all
of your expenses other than direct costs. These indirect costs, which comprise
your overhead, fall into one of two categories: fixed and variable shop and administrative
expenses.
of your expenses other than direct costs. These indirect costs, which comprise
your overhead, fall into one of two categories: fixed and variable shop and administrative
expenses.
Fixed & Variable Expenses
In estimating a job, a
portion of your shop and administrative costs (or overhead), must be absorbed
into the cost of the job. For a small or medium-sized shop, overhead refers to
all of your shop and administrative expenses, which are not directly charged to
jobs. These indirect costs are often categorized as either fixed expenses or
variable expenses.
portion of your shop and administrative costs (or overhead), must be absorbed
into the cost of the job. For a small or medium-sized shop, overhead refers to
all of your shop and administrative expenses, which are not directly charged to
jobs. These indirect costs are often categorized as either fixed expenses or
variable expenses.
Fixed Expenses. As the name implies, fixed expenses stay
the same from one month to the next or, at the most, change very little.
Because these costs are relatively constant, they are predictable, which you
might consider as a positive. The downside to a fixed cost is there is not much
you can do to manage these expenses. Obviously, this can be a problem during an
economic downturn. Examples of fixed expenses include:
the same from one month to the next or, at the most, change very little.
Because these costs are relatively constant, they are predictable, which you
might consider as a positive. The downside to a fixed cost is there is not much
you can do to manage these expenses. Obviously, this can be a problem during an
economic downturn. Examples of fixed expenses include:
● Building rental or
mortgage payment
mortgage payment
● Car lease or car
payment
payment
● Building Insurance
● Equipment depreciation
● Management salaries
Variable Expenses. On the other hand, variable expenses can
vary or fluctuate from month to month. Because variable expenses can
change, which often happens among companies that are growing rapidly, they
affect your shop rate. For this reason, you should track your shop overhead as
well as your direct labor hours and adjust your shop rate accordingly. Examples
of variable expenses include:
vary or fluctuate from month to month. Because variable expenses can
change, which often happens among companies that are growing rapidly, they
affect your shop rate. For this reason, you should track your shop overhead as
well as your direct labor hours and adjust your shop rate accordingly. Examples
of variable expenses include:
● Utilities (Gas and
Electric)
Electric)
● Water and Refuse
● Travel
● Entertainment
● Cleaning Supplies
● Office Supplies
● Phone
● Advertising &
Sales Promotion
Sales Promotion
● Postage & Shipping
● Website Development
Controlling Your Variable Expenses. In any shop, variable expenses as well as
revenues fluctuate over time. When they do, the multiplier used to allocate
costs can change too. There’s nothing that you can do to change fixed expenses
or direct costs. On the other hand, you can take steps to keep variable
expenses and some direct costs in check.
revenues fluctuate over time. When they do, the multiplier used to allocate
costs can change too. There’s nothing that you can do to change fixed expenses
or direct costs. On the other hand, you can take steps to keep variable
expenses and some direct costs in check.
The first step is to
carefully monitor expenses, in both good times and bad. Other measures include
questioning the value of every purchase to your shop; taking advantage of
discounts; and obtaining multiple bids for raw materials. You should also
encourage employees to look for ways to cut costs. Finally, you can
reduce unnecessary inventory of shop and office supplies. Every step you take
to lower expenses, decreases overhead and shop rate, which makes you more
competitive and increases your bottom line.
carefully monitor expenses, in both good times and bad. Other measures include
questioning the value of every purchase to your shop; taking advantage of
discounts; and obtaining multiple bids for raw materials. You should also
encourage employees to look for ways to cut costs. Finally, you can
reduce unnecessary inventory of shop and office supplies. Every step you take
to lower expenses, decreases overhead and shop rate, which makes you more
competitive and increases your bottom line.
Calculating Your Shop Rate.
In visiting sign shops across the country, one of the most common
questions that I have been asked are what shop rate are other shops charging
for labor. One shop might charge $50 an
hour. Another shop could charge $60 per hour.
questions that I have been asked are what shop rate are other shops charging
for labor. One shop might charge $50 an
hour. Another shop could charge $60 per hour.
Using an average rate may not be accurate for your shop, because
the overhead for your shop will be much different than the overhead for a
competitor’s shop. The productivity rate for two shops can also vary greatly.
The better question is how you can calculate an accurate rate for your shop?
the overhead for your shop will be much different than the overhead for a
competitor’s shop. The productivity rate for two shops can also vary greatly.
The better question is how you can calculate an accurate rate for your shop?
In allocating overhead
to direct labor hours as your cost driver, here’s a simple way to calculate
your hourly shop rate:
to direct labor hours as your cost driver, here’s a simple way to calculate
your hourly shop rate:
● Add up your shop and
administrative costs (overhead) for a particular period, such as a year. You
can easily find past costs from the financial documents that your accountant
creates for you, such as an income statement (P&L).
administrative costs (overhead) for a particular period, such as a year. You
can easily find past costs from the financial documents that your accountant
creates for you, such as an income statement (P&L).
● Calculate the number
of direct labor hours for the same period. This should be easy, if you use
labor tickets.
of direct labor hours for the same period. This should be easy, if you use
labor tickets.
● Divide your overhead
by the number of direct labor hours.
by the number of direct labor hours.
Example:
Shop and administrative
costs during a month
costs during a month
Number of direct labor
hours during that month = Hourly Shop
Rate
hours during that month = Hourly Shop
Rate
$6000
(Overhead)
(Overhead)
120 (Hours Charged
Directly to Jobs) = $50/hr. Shop
Rate
Directly to Jobs) = $50/hr. Shop
Rate
You can use your history
of past overhead expenditures and direct labor hour to determine your shop
rate. The shortcoming of using past data is that it may not be indicative of
future expenses and direct labor.
of past overhead expenditures and direct labor hour to determine your shop
rate. The shortcoming of using past data is that it may not be indicative of
future expenses and direct labor.
To compensate for
anticipated changes, you may wish to use this historical information as a
reference point. Using this information as your benchmark, you can forecast
future costs and direct labor for the upcoming year. Based on your projections,
you can adjust your shop rate.
anticipated changes, you may wish to use this historical information as a
reference point. Using this information as your benchmark, you can forecast
future costs and direct labor for the upcoming year. Based on your projections,
you can adjust your shop rate.
Activity Based Costing
A shortcoming of
applying overhead to direct labor is that a disproportionately high amount of
overhead may be applied to low skilled manual labor jobs. The result of using
an averaged burdened shop rate for all types of jobs is that you could price
yourself out the market for labor intensive projects.
applying overhead to direct labor is that a disproportionately high amount of
overhead may be applied to low skilled manual labor jobs. The result of using
an averaged burdened shop rate for all types of jobs is that you could price
yourself out the market for labor intensive projects.
On the other hand,
projects which are run on very expensive equipment, but requiring much less
labor, may be underpriced. You might be winning many of these contracts but may
not be covering a realistic share of the overhead.
projects which are run on very expensive equipment, but requiring much less
labor, may be underpriced. You might be winning many of these contracts but may
not be covering a realistic share of the overhead.
To correct for the
shortcomings of applying an averaged burdened labor rate, you may want to consider
allocating overhead costs based on specific job activities within your shop.
This means that you will need to establish different burdened rates for each
type of function or department within your shop.
shortcomings of applying an averaged burdened labor rate, you may want to consider
allocating overhead costs based on specific job activities within your shop.
This means that you will need to establish different burdened rates for each
type of function or department within your shop.
In other words, you
could establish different rates for different types of printers, as
well as different rates for weeding and masking computer cut vinyl. Or in a
screen print shop, you could base hourly rates for the various departments,
such as screen making, printing, finishing and shipping. Allocation of your
expenses could be based on the investment in a particular job station in
relation to the overall investment in you shop.
could establish different rates for different types of printers, as
well as different rates for weeding and masking computer cut vinyl. Or in a
screen print shop, you could base hourly rates for the various departments,
such as screen making, printing, finishing and shipping. Allocation of your
expenses could be based on the investment in a particular job station in
relation to the overall investment in you shop.
A more accurate but a
much more complex method of cost allocation is to assign shop and
administrative costs to individual departments within your shop. Developing a
complicated estimating system, such as this, requires more time to construct,
implement and maintain. For most sign shops, this is impractical. For larger
manufacturers, with distinct departments, each of which having distinct
production overhead costs, activity based costing is often necessary.
much more complex method of cost allocation is to assign shop and
administrative costs to individual departments within your shop. Developing a
complicated estimating system, such as this, requires more time to construct,
implement and maintain. For most sign shops, this is impractical. For larger
manufacturers, with distinct departments, each of which having distinct
production overhead costs, activity based costing is often necessary.
Having worked for screen
printers, the basic departments in manufacturing include: design and production
art; screen making; printing; finishing; and shipping. An activity based
costing system requires that you divide expenses into two categories. To the
primary category you could assign general expenses which apply to your shop as
a whole. You could divide these primary expenses to the different departments
within manufacturing based on the square footage utilized by that department.
printers, the basic departments in manufacturing include: design and production
art; screen making; printing; finishing; and shipping. An activity based
costing system requires that you divide expenses into two categories. To the
primary category you could assign general expenses which apply to your shop as
a whole. You could divide these primary expenses to the different departments
within manufacturing based on the square footage utilized by that department.
The next step is to
identify those costs of which are unique to that department. In a print shop
these costs include the expenses associated with the equipment used
specifically in a department. In the print department, these include costs for
presses and racks. In finishing, the equipment costs that need to be accounted
for include plotters, die cutters and laminators.
identify those costs of which are unique to that department. In a print shop
these costs include the expenses associated with the equipment used
specifically in a department. In the print department, these include costs for
presses and racks. In finishing, the equipment costs that need to be accounted
for include plotters, die cutters and laminators.
After adding up the
primary and secondary costs for each department for a specific time period, the
costs are divided by the number direct hours charged in that department for the
same time period.
primary and secondary costs for each department for a specific time period, the
costs are divided by the number direct hours charged in that department for the
same time period.
You can see how
complicated that this method for cost allocation is. The advantage is that you
assign a more realistic and accurate amount of overhead for a particular
activity. More precise allocation of overhead ensures that it is less likely
that you will lose money as well as less likely that you will leave money on
the table. It also means that you are less likely to overcharge and price
yourself out of the market. The risk, though, is that anytime a system becomes
more complex, you increase the odds that a mistake can occur.
complicated that this method for cost allocation is. The advantage is that you
assign a more realistic and accurate amount of overhead for a particular
activity. More precise allocation of overhead ensures that it is less likely
that you will lose money as well as less likely that you will leave money on
the table. It also means that you are less likely to overcharge and price
yourself out of the market. The risk, though, is that anytime a system becomes
more complex, you increase the odds that a mistake can occur.
Tracking Overhead
Your shop overhead will
either increase or decrease over time, especially if your business is rapidly
growing. As your shop sells more, your variable costs will increase. Utility
costs will typically increase, as well as will your expenditures for shop and
office supplies and salaries for new personnel.
either increase or decrease over time, especially if your business is rapidly
growing. As your shop sells more, your variable costs will increase. Utility
costs will typically increase, as well as will your expenditures for shop and
office supplies and salaries for new personnel.
Discretionary spending
on advertising and travel and entertainment often also rises as the good times
roll and occasionally can get out of control. The good news these discretionary
expenses are the easiest to cut when the need arises. As shop and
administrative increase, you need to track your overhead expenditures and how
it affects your shop rate.
on advertising and travel and entertainment often also rises as the good times
roll and occasionally can get out of control. The good news these discretionary
expenses are the easiest to cut when the need arises. As shop and
administrative increase, you need to track your overhead expenditures and how
it affects your shop rate.
Here is an actual example of how changes in overhead and direct
labor hours affected the hourly shop rate for one screen printer during the
first three years of operation:
labor hours affected the hourly shop rate for one screen printer during the
first three years of operation:
Year
1 $600,000 Overhead
= $50/Hourly Shop Rate
1 $600,000 Overhead
= $50/Hourly Shop Rate
12,000 Direct
Labor Hours
Year 2 $800,000
Overhead =
$44.45/ Hourly Shop Rate
Overhead =
$44.45/ Hourly Shop Rate
18,000 Direct Labor Hours
Year
3 $1,020,000 Overhead
= $ 35.42/ Hourly Shop Rate
3 $1,020,000 Overhead
= $ 35.42/ Hourly Shop Rate
28,800 Direct Labor Hours
Labor Hours
In estimating labor
hours for any job, you want to separate it into the various activities or cost
pools involved in its production. For a digital printer, these discrete
activities might include:
hours for any job, you want to separate it into the various activities or cost
pools involved in its production. For a digital printer, these discrete
activities might include:
● Design &
Production Art
Production Art
● Sheeting (of vinyl
material)
material)
● Printing
● Laminating
● Plotter cutting
● Packaging &
Shipping
Shipping
The second step in
costing the job is to estimate how much time is required for each activity. By
totaling the number of hours for the different activities and multiplying the
total by the shop rate, you have calculated your labor cost for the job. If you
are producing a number of the same graphic, divide the total by the number of
units produced.
costing the job is to estimate how much time is required for each activity. By
totaling the number of hours for the different activities and multiplying the
total by the shop rate, you have calculated your labor cost for the job. If you
are producing a number of the same graphic, divide the total by the number of
units produced.
Sample Estimate
|
Material
|
SF/ piece
|
Material
Cost/SF
|
# of pieces
Produced
|
Raw Cost
|
Direct
Material Cost
Plus 10%
Scrap Rate |
Burdened
Material Cost
(Divide by
.9) |
Total
|
|
Vinyl Film
|
6
|
$1.25
|
5
|
$37.50
|
$41.25
|
$45.83
|
|
|
Laminate
|
6
|
$1.00
|
5
|
$30.00
|
$33.00
|
$36.67
|
|
|
Application Tape
|
6
|
$.18
|
5
|
$5.40
|
$5.94
|
$6.60
|
|
|
Substrate
|
8
|
$2.25
|
5
|
$90.00
|
$99.00
|
$110.00
|
|
|
Total Material Cost
|
$162.90
|
$179.19
|
$199.10
|
$199.10
|
|||
|
Labor
|
Hourly
Wages |
Direct
Labor
Cost |
Shop
Rate |
Labor
Cost
|
|||
|
Design Art
|
1
|
$12.00
|
$12.00
|
$50.00
|
$50.00
|
||
|
Sheeting
|
.25
|
$12.00
|
$3.00
|
$50.00
|
$12.50
|
||
|
Printing
|
2.25
|
$12.00
|
$27.00
|
$50.00
|
$112.50
|
||
|
Laminating
|
.75
|
$12.00
|
$9.00
|
$50.00
|
$37.50
|
||
|
Plotter Cutting
|
1
|
$12.00
|
$12.00
|
$50.00
|
$50.00
|
||
|
Packaging & Shipping
|
.5
|
$12.00
|
$6.00
|
$50.00
|
$25.00
|
||
|
Total Labor Cost
|
5.75
|
$69.00
|
$50.00
|
$287.50
|
$287.50
|
||
|
Project Cost
|
$486.60
|
||||||
In this sample estimate,
the Direct Costs include $179.19 in Direct Material Cost (with an additional
10% scrap rate) and $69.00 in Direct Labor Cost for a total of $248.19.
the Direct Costs include $179.19 in Direct Material Cost (with an additional
10% scrap rate) and $69.00 in Direct Labor Cost for a total of $248.19.
By comparison, when you
allocate shop overhead using labor as the cost driver, the total project cost
is $486.60, which includes $199.10 in Burdened Material Cost and $287.50 for
labor.
allocate shop overhead using labor as the cost driver, the total project cost
is $486.60, which includes $199.10 in Burdened Material Cost and $287.50 for
labor.
Pricing
Costing and pricing are
different. Estimating your costs in producing of a job just covers your expenses
for the project. Just as you and your employees deserve a paycheck, your
business, as a separate entity, needs to realize a return on investment,
regardless of whether you are the sole owner or you have investors.
different. Estimating your costs in producing of a job just covers your expenses
for the project. Just as you and your employees deserve a paycheck, your
business, as a separate entity, needs to realize a return on investment,
regardless of whether you are the sole owner or you have investors.
Costing provides you
with the foundation for determining a competitive selling price. After you
estimate your costs, you can calculate your selling price – one that provides
your business with an acceptable profit and allows you to remain profitable in
your market.
with the foundation for determining a competitive selling price. After you
estimate your costs, you can calculate your selling price – one that provides
your business with an acceptable profit and allows you to remain profitable in
your market.
Remember, that there is
a difference between the estimated cost, which just covers your direct and
indirect costs, and your selling price. The easiest way to establish a selling
price is to calculate all of your direct costs along with an allocated portion
of your overhead and add in a percentage for profit.
a difference between the estimated cost, which just covers your direct and
indirect costs, and your selling price. The easiest way to establish a selling
price is to calculate all of your direct costs along with an allocated portion
of your overhead and add in a percentage for profit.
Suppose, for example,
that you would like your business to add 25% profit to your costs on the job.
To do that you divide $486.60 in costs by .75 to achieve a selling price of
$648.80.
that you would like your business to add 25% profit to your costs on the job.
To do that you divide $486.60 in costs by .75 to achieve a selling price of
$648.80.
Job Closeout
As a sign maker you
understand better than any outsider, what your direct and indirect costs are.
Based on your experience you have the ability to develop costing standards
particular to your business. After you complete your jobs, you need to compare
your estimates with your actual costs from a selection of key projects in a
closeout session with your key employees. From that comparison, you can review
the variances and reevaluate your standards.
understand better than any outsider, what your direct and indirect costs are.
Based on your experience you have the ability to develop costing standards
particular to your business. After you complete your jobs, you need to compare
your estimates with your actual costs from a selection of key projects in a
closeout session with your key employees. From that comparison, you can review
the variances and reevaluate your standards.
For an accurate
comparison, you must maintain good records on material pulled for a job and
production hours charged to specific activities, such as design and production
art, machine set up, printing, laminating and
plotter cutting.
comparison, you must maintain good records on material pulled for a job and
production hours charged to specific activities, such as design and production
art, machine set up, printing, laminating and
plotter cutting.
A careful comparison
between the estimate and actuals will reveal any shortcomings in estimating
standards or production planning. The closeout process should also uncover any
deficiencies in purchasing practices and production problems.
Periodically, you should also recalculate how any changes in your overhead
costs and production volume affects your hourly shop rate.
between the estimate and actuals will reveal any shortcomings in estimating
standards or production planning. The closeout process should also uncover any
deficiencies in purchasing practices and production problems.
Periodically, you should also recalculate how any changes in your overhead
costs and production volume affects your hourly shop rate.
Conducting regular job
closeout session gives you an opportunity uncover any variances between your
estimates and the actual material used and actual recorded labor in
production. If major discrepancies are revealed, you need to determine
the source of the inaccuracies.
closeout session gives you an opportunity uncover any variances between your
estimates and the actual material used and actual recorded labor in
production. If major discrepancies are revealed, you need to determine
the source of the inaccuracies.
If you are not recording
material used, you need to institute some type of tracking system such as using
a materials requisition sheet. From your time cards you will also need to
compare the actual number of hours charged to a job versus your estimated
labor.
material used, you need to institute some type of tracking system such as using
a materials requisition sheet. From your time cards you will also need to
compare the actual number of hours charged to a job versus your estimated
labor.
If more material or
labor was used than projected, you need to determine if there was a problem
encountered or was your estimate unrealistic. From your review of the job, you
may determine that you need to make changes to your estimating procedures.
These changes could include adjusting your scrap rate, or modifying your labor
standards. On the other hand, if your estimate was reasonable, the job
closeout may reveal problems in manufacturing.
labor was used than projected, you need to determine if there was a problem
encountered or was your estimate unrealistic. From your review of the job, you
may determine that you need to make changes to your estimating procedures.
These changes could include adjusting your scrap rate, or modifying your labor
standards. On the other hand, if your estimate was reasonable, the job
closeout may reveal problems in manufacturing.
Conclusion
The benefits of
developing and implementing a costing system, similar to the one
described, ensures that you cover all of your direct and indirect costs. More
realistic costing also provides a solid foundation for pricing jobs so you can
make more sales at a higher profit in a highly competitive marketplace.
developing and implementing a costing system, similar to the one
described, ensures that you cover all of your direct and indirect costs. More
realistic costing also provides a solid foundation for pricing jobs so you can
make more sales at a higher profit in a highly competitive marketplace.
Developing a costing
program requires that you to examine your manufacturing practices, track all of
your expenses and measure variances between estimated and actual costs.
Evaluating your operation not only helps in establishing production standards,
but also reveals where you need to make improvements in areas, such as
purchasing practices, production planning and shop supervision. That way
you can take the necessary corrective actions.
program requires that you to examine your manufacturing practices, track all of
your expenses and measure variances between estimated and actual costs.
Evaluating your operation not only helps in establishing production standards,
but also reveals where you need to make improvements in areas, such as
purchasing practices, production planning and shop supervision. That way
you can take the necessary corrective actions.
There are several
different methods of cost allocation. Per se, there isn’t just one right way to
allocate overhead. Each way has its own merits, as well as its own
shortcomings. Allocation of overhead is not a precise science – quite the
contrary. You can apply each one of these methods to the same set of numbers
(the same direct labor and direct material costs and the same overhead) and
come up with very different results. As a shop owner, you need to
discover which method works best for your business.
different methods of cost allocation. Per se, there isn’t just one right way to
allocate overhead. Each way has its own merits, as well as its own
shortcomings. Allocation of overhead is not a precise science – quite the
contrary. You can apply each one of these methods to the same set of numbers
(the same direct labor and direct material costs and the same overhead) and
come up with very different results. As a shop owner, you need to
discover which method works best for your business.
About Jim Hingst: Sign business authority on vehicle wraps, vinyl graphics, screen printing, marketing, sales, gold leaf, woodcarving and painting.
After fourteen years as Business Development Manager at RTape, Jim Hingst retired. He was involved in many facets of the company’s business, including marketing, sales, product development and technical service.
Hingst began his career 42 years ago in the graphic arts field creating and producing advertising and promotional materials for a large test equipment manufacturer. Working for offset printers, large format screen printers, vinyl film manufacturers, and application tape companies, his experience included estimating, production planning, purchasing and production art, as well as sales and marketing. In his capacity as a salesman, Hingst was recognized with numerous sales achievement awards.
Drawing on his experience in production and as graphics installation subcontractor, Hingst provided the industry with practical advice, publishing more than 190 articles for publications, such as Signs Canada, SignCraft, Signs of the Times, Screen Printing, Sign and Digital Graphics and Sign Builder Illustrated. He also posted more than 500 stories on his blog (hingstssignpost.blogspot.com). In 2007 Hingst’s book, Vinyl Sign Techniques, was published. Vinyl Sign Techniques is available at sign supply distributors and at Amazon.
© 2019 Jim Hingst, All Rights Reserved.
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