Today I wanted to provide a more in-depth manufacturer’s price sheet, one that explains how to track direct material, direct labor, overhead and most importantly, how to account for profit within your product’s pricing. The reality is that not all companies have the ability to track these costs through an ERP system. As such, this sample excel sheet will allow you to track the costs of all of your raw materials, parts and labor costs in manufacturing. I’ve broken this up into four sections, with the excel sheet at the bottom of the post and an explanation of how each four of these steps work.
What Role Does Your Overhead and Profit Play in Price?
It’s important to understand the role your company’s overhead and profit plays with respect to your product’s price. This is one mistake that a large number of my smaller customers make. You must account for overhead, and secure a profit, at the same time.
Overhead pertains to those costs that are above and beyond what is included when manufacturing a given product. These include the ancillary support costs of running a business. It is calculated by taking your prior month’s, or prior quarter’s, indirect expenses and dividing them by your direct expenses.
Your profit is that portion of your price that funds your company’s growth and ultimately contributes to your net profit. In order to better understand this distinction, we’ll review how overhead is calculated and the differences between indirect and direct expenses.
Overhead Percentage: Calculating overhead involves taking indirect expenses and dividing them by direct expenses. There are other ways to calculate overhead, but this is the simplest by far.
Overhead = indirect expenses / direct expenses
Direct Expenses: These are those costs that go directly to the production of your product. They include all the raw materials and labor expenses in manufacturing.
Indirect Expenses: These are all those costs that don’t play a direct role in manufacturing a product. However, they are essential in supporting your business’s day-to-day activities.
Section #1 Material
The price sheet is structured so that you can occupy all fields that aren’t highlighted. The light blue highlighted portions include calculations that will do the work for you. For the first section, input your direct raw materials, the quantity used and cost to manufacture your product. This pricing sheet is based on a “per-unit” basis, so it represents the company’s manufacturing and pricing for one single unit.
* I have included a 5% indirect cost of material – you can remove this if you wish.
The second portion summarizes the direct labor involved in producing one unit. It includes a section where you account for your set up times, your cycle times (run times) and your labor cost per hour. Remember, every operation in manufacturing requires a set up time. Make sure to input that value in minutes and be aware of the conversion of hours to minutes, such as the 125 minutes for CNC programming and machining.
Section #3 Overhead:
In our example, the company’s overhead is 30%. Therefore, the excel sheet adds up the direct material and direct labor as one total of $955.06. Now, this amount isn’t shown on the table, but is included in the overhead calculation box. That $955.06 is then multiplied by 30%, giving us $286.52, which is in the blue highlighted box.
To read more about calculating overhead (as described in the video above), please read: Calculating Overhead Rate & Percentage for Small Businesses
Section #4 Price:
Our company wants to make 25% profit on the sale of each of its products. Therefore, it takes the subtotal of direct, indirect and overhead expenses and divides this amount ($1241.58) by 0.75 (which is 25%). This gives the company a sell price of $1,655.44 for each unit manufactured.
- Direct Material: $768.00
- Direct Labor: $186.46
- Overhead: $286.52
- Subtotal: $1241.58
- Sell price with 25%: $1,655.00
Using Your Volumes of Scale
There are two important notes about set up times and manufacturing cycle times. First, your set-up time is a one time transaction cost. Or, put differently, it’s a one time cost when manufacturing this product. This set up time won’t improve no matter how many units you manufacture.
Second, manufacturing run times, or cycle times, can improve if you pursue proactive strategies to increase production throughput. However, even these are limited as you’ll eventually reach a point where cycle times can’t be lowered any further. Third, if you manufacture large volumes, then match those economies of scale on this pricing sheet; in terms of raw material and labor costs.
Remember, your overhead must cover those company costs that aren’t directly attached to a given unit. These are essentially costs that are spread out over the entire company and include functions such as sales, marketing, customer service, operations etc. This overhead percentage doesn’t cover your profit. You must calculate profit after adding direct material, direct labor and overhead. Here is the sample manufacturer price sheet: Download Manufacturers Price Sheet Direct Material Direct Labor Overhead Profit
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