Overhead vs rates

This will mainly apply to businesses with multiple departments.

disclosure.. im def not an accountant. LOL

How do you guys divide up your cost for supervision across your departments? For instance.. we have a shop rate of 75 per hour in the machine shop.. that includes man, machine, and indirect labor.. but what if you have a manager, or operator that covers multiple departments. Is there any trick or formula you guys use to help divy that cost up?

I was thinking that I should just group ALL supervisory across the company, and average that cost out to every department... but the departments don't turn even remotely close to the same revenue or man hours, so it doesn't work. so now, I'm breaking it down by % of revenue generated per department, and multiplying those % values to the cost and applying it to each departments labor rate.

I know its not really a hard question, just interested in seeing how other companies do it.

I always thought of it as "Direct Labor" revenue generators, or "Indirect labor" supervision, accounting, and ect. costing. "Overhead" Rent, insurance, repairs, and so forth as fixed cost.

These were % out of prior years gross revenues and actual cost with adding a small increased in cost (guesstimate) factors of operational expenses, Raises, rate increases, and ect.

At some point over the years the numbers just sort of settled in and were adjusted only yearly on the spreadsheet.

As you kind of inferred, different departments had different hourly rates and different OH rates so a roaming manager was a challenge to cost out. When I worked for one of the big 'aerospacers' they just included them in a group called the "operational management " and costing was based on a percentage of the gross OH cost. Not helpful I know. I assume it was some accounting magic known only by the number crunchers in finance.

ok, so I changed up my calculations a little bit...If you look at it as a total fixed cost based on the total revenue the company generates, its easy and accurate.. but it doesn't tell you where the money goes at a more basic level.

If you just say that person cost $5.769 per overhead hour, (10,400 manhours/year) then you end up with a number that you can add to every departments billable hourly rate. Then, It doesn't matter who does however many hours. as long as you generate more total billable hours at the end of year, that the estimate..you made money.. I like that way.. i can just track and project billable hours and either we meet or exceed. Then its just a matter of a billable rate break down.. which.. everyone should have.

A very old and never-resolved question: When calculating the cost of a part, do you assign the machine overhead according to that machine's payment, power consumption, floor space, etc., prorated per that operator's working hour, or do you average everything in the plant, including labor, and cost it that way based only on time per part? The first method is more accurate because it's part-specific and logical: if that machine is paid for it's lower manufacturing overhead, which is good to know. It gives actual knowledge compared to the shop-average method, which is really just an accounting formality. But the real-time, real-cost calculation is extremely laborious if broken down all the way to pennies per saw cut like they taught a hundred years ago. My feeling is that if you refigure it the hard way every five years or so, the exercise--if nothing else--is good practice at cost estimating.

Motorsports-X said:

Then, It doesn't matter who does however many hours. as long as you generate more total billable hours at the end of year, that the estimate..you made money.. I like that way.. i can just track and project billable hours and either we meet or exceed. Then its just a matter of a billable rate break down.. which.. everyone should have.

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Or you loose your ass.

wheelieking71 said:

Or you loose your ass.

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certainly possible.. but i tend to think that part is addressed in other aspects of your business management. if you know your not going to have sales next year, you dont hire someone in the first place.