The following video breaks down how a manufacturer should come up with a price for industrial finished goods. First, the company must account for its material costs and apply a 5 percent indirect cost to that portion of the manufacturer's price sheet.
This 5 percent is meant to offset overruns in production and or additional costs of financing inventory and material purchases.
Second, the company must account for its labor relative to each operation performed to turn a raw material into a finished good. The calculation involves defining the operation and applying the labor cost to both the setup time in manufacturing and the actual run time.
Third, all labor costs are added in order to come up with a complete total for all the costs of manufacturing a given product. Those costs are then followed up by the company's overhead, which is calculated by taking its indirect expenses divided by its direct expenses. Indirect expenses are those expenses that are in addition to the the costs needed to produce a part. Direct expenses are exactly that. These include the costs involved or expenses involved in manufacturing the part.
Finally, the company adds its mark-up in order to secure a profit on the sale. Profit is critical because it helps to fund the company's pursuit of new product introductions and secure its long-term future.
Here is a sample of the Manufacturer Price Sheet in Excel Format
http://www.driveyoursuccess.com Video explains how to price a product with direct material, labor, overhead and profit
Thank you Ian for the clear explanation, really good video
- The material cost is $768.6 = (732*1.05)
- The formula for Labor cost in the spreadsheet is multiplying setup and run time cost (it should be added), that's why the cost of 45 mins is higher than 1 hour. (=($C17/60)*($E17)+($D17/60*$E17))
My calcs show...
1. Total Material = $732 + 5% = $768.60...?
2. Labour times - how does 45 minutes of labour - (set up of 10 mins and run time of 35 = total 45 mins...) at $20 per hour equal $38.89...? Should be $15.00...???
i really confused about some points. i think the total material should be 768.6. And when u calculate the 30% overhead, should we use the direct expense of material plus the direct expense of labor? but u use the total material. i think the 30% overhead is a rate. is it (36.6+indirct labor)/(732+186.46)=0.3 ? so we are trying to find the infirect labor costing?
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