Sheet metal, CNC shops, machine shops and many other job shops provide a valuable service to their customers. For a job shop to be a profitable business, the service rate should cover the cost of doing business plus have a certain amount of margin or profit built into the price customers pay. If this is too low, you will be gaining new work but this will only last as long as you have money in the bank. You business will fail because the owner needs to earn an income. If the price is too high, customers will choose a competitor. Some high level ways to calculate your hourly shop rate is shown below. Hourly rate calculations are not that complicated but should be looked at carefully in order to be a profitable company.
Equipment
Calculate the cost per hour of operation and include a markup for maintenance hours in your calculation to determine a fully burdened cost per machine hour. The formula is: (machine purchase cost + expected lifetime maintenance cost) / expected hours of operating life. You can choose to do this per machine or an average of all machines.
Labor
Develop an hourly shop rate: (total annual labor costs + taxes + benefits + paid time off) / (total annual hours worked – breaks and training time). This is your direct labor cost per hour.
Overhead
Any costs not directly involved in machining a part is overhead. These include costs for administrative staff salary, equipment, furniture, building lease, maintenance and office supplies. Calculate the annual costs of these, then divide by total labor or machine hours for the year. This will be your overhead cost per hour.
Markup
Here’s where the shop earns its keep. The owner’s income and future growth for the shop depends on this calculation working well. Simple calculation is markup = 1 + (owner’s salary + benefits + annual earnings goal) / annual service hours) / (machine + labor + overhead cost per hour). Converted to a percentage, for example, this will come to something like 120 percent, basically adding 20 percent profit to the cost of doing business.
Service Rate Calculation – Average Rate
Use this formula when your machine costs are fairly similar from one piece of equipment to another: Average overall shop rate = (average machine cost per hour + labor and overhead cost per hour) x markup x total hours for the job.
Service Rate Calculation – Machine-Specific Rate
Use this formula when cost of equipment varies greatly from piece to piece and not all machines are used in each service. Rate = (specific machine(s) cost per hour + labor & overhead cost per hour) x markup x total hours for the job.
MIE Solutions offers a made to order job shop ERP system designed for the manufacturer of goods and products. Most accounting systems are designed for the basic AR, AP and GL side of financials where a manufacturing software product deals with the actual production of the goods and services. MIE Trak is a full featured ERP system for the made to order and engineer to order manufacturer.
