As a manufacturer, your margin sizes are everything. This is especially true in 2022 when production costs are skyrocketing and bottlenecks are hampering manufacturing across virtually every industry and sector. In order to keep your business afloat and successfully plan for long-term success, you need to be able to calculate your manufacturing overhead.
These are the indirect costs of creating your product, which often constitute the bulk of manufacturing process costs. If you want a leaner, more cost-effective business operation in 2022, read on to find out how to quickly calculate your manufacturing overhead costs.
Identify Manufacturing Overhead
First off, you need to know which manufacturing costs are defined as overhead and how much of your cash is directed to these processes. There are multiple types of overhead costs, all of which affect the cost of producing goods.
There are fixed overhead costs, which do not change from month to month. Examples include factory space rental, annual repairs, or any other expense that generally stays the same every year. It also includes necessities such as manufacturers insurance which, although usually very affordable if your choose the right provider, is usually a fixed cost.
Then there are variable overhead costs, which change depending on your output volume. This might include raw materials, marketing costs, machinery bills, and shipping fees.
Finally, you have your semi-variable overhead costs. This includes your expenses that are usually stable but might vary depending on certain production factors. For example, your electricity bill will be higher during the “busy” season, so this would count as semi-variable overhead.
Calculate Your Overhead
Once you have all of these costs added together, you are ready to calculate your raw overhead. You can combine all of these costs into one figure, or you can do a per-unit calculation. For the latter, simply multiply your overhead cost per unit by the exact number of units that you produce. For example, if you spend $50 producing one unit and you produce 500 units in a month, then your overhead would be $25,000. To calculate your overhead as a percentage of your overall costs, follow this simple equation:
Manufacturing Overhead / Number of Sales x 100
So, let’s say you made $500,000 in sales last year. Let’s also say that your combined overhead is $250,000. To get your overhead as a percentage, you simply run the numbers on $250,000 / $500,000 x 100 = 50%. Therefore, your overhead is 50%, which would generally be considered to be quite high by most standards. If your overhead is too high, now is the time to look at ways to bring down costs.
Calculate Your Allocated Overhead
Oftentimes, it is not enough to calculate manufacturing overhead on its own. You should go one step further and allocate each cost so that you know how much overhead is generated by each component of your business. For example, you might want to work out the overhead on a particular machine. You could work this out with the following calculation:
Allocated Overhead = Total Overhead / Total Hours Machine Was Used
So, if the total overhead is $50 and it takes two hours of machine use to create one unit, then the allocated manufacturing overhead would be $25 per product.
Fine-Tune Your Business in 2022
When you know your manufacturing overhead, you can make empowered decisions to turbocharge your growth. For more actionable advice to fine-tune your business in 2022, we have got you covered. Make sure to consult our expert Business pages to learn more.