Standard Shop Rate

Do you remember when it was time to quote and you sat down with your specifications, pencil and paper and started to write down how long each processes would take to manufacture the given specifications.   You would add up all the setup time, then go through and add up all the cycle time per process by hand, and if not by hand, an expensive calculator.   Once you finished adding up the estimated time you then did one last calculation like this

Labor Dollars = ((Setup Time)/(Pieces Being Quoted)) + Cycle Time)*(Shop Rate)

Shop labor rates a fews years ago usually consisted of a single shop rate for every machine and operation in your shop including machine shops, sheet metal shops to wood working and plastic job shops.   To calculate a quote the shop rate was much simpler when there was only a single rate.   Now with the advent of computers you can have shop rates that are specific to each machine because the  actual calculation is done by a computer now.   A single shop rate had some advantages at that time but those advantages are not applicable in todays advanced manufacturing facilities.

Plant-wide versus departmental versus individual machine burden rates

If overhead does not vary between departments you can use a plant-wide shop rate.   This is the least desired approach because lower cost departments would be absorbing costs from other more expensive departments.  If overhead varies from department to department (rates or drivers) and overhead is significant, departmental burden rates may result in a more accurate allocation of overhead.   If burden rates between machines in a department vary significantly a more accurate approach would be specific overhead absorption rates.

QuoteIt from MIE Solutions offers the ability to have the most accurate estimating process because you are able to have specific overhead absorption rates per machine.

Once you being quoting and estimating using machine specific overhead you will be more capable of competing in this highly competitive job shop environment.

The next discussion will give examples of how to calculate machine specific shop rates.