To calculate factory overhead costs you must consider everything that is associated with production including electricity, heat, other utilities, maintenance and repairs. You should also factor in building insurance, insurance on raw materials and on work in progress, equipment, supplies, property taxes on your building, payroll taxes on employees’ wages, and workers’ compensation insurance.
You may be tempted to include marketing and administration costs when working out what the total factory overheads are, but these shouldn’t be included if you are trying to work out manufacturing costs per unit because they have nothing to do with the manufacturing process. Naturally, they need to be included in your overall calculations so that you always know where you are up to with your finances and so you do not overstretch yourself and have cash flow issues that can be crippling.
When you are calculating factory overhead costs so that you can determine a budget, you should break it down into two aspects, your overall overheads, and then your cost per unit of whatever it is your factory produces.
To work out your total factory overhead costs for each business year, you need to estimate all the costs that are likely to arise. To calculate unit cost, you should take that total annual figure and divide it by how many units you expect to manufacture. You will then know how much it costs to produce each unit, and be able to calculate what you will charge for it, based on your overall expenditure and market forces. This is crucial, not only for your own profit margins, but in case you need to develop a business plan for any financial borrowing. No bank or financial institution will consider you for any kind of business loan unless you provide these figures.
You may be tempted to include marketing and administration costs when working out what the total factory overheads are, but these shouldn’t be included if you are trying to work out manufacturing costs per unit because they have nothing to do with the manufacturing process. Naturally, they need to be included in your overall calculations so that you always know where you are up to with your finances and so you do not overstretch yourself and have cash flow issues that can be crippling.
When you are calculating factory overhead costs so that you can determine a budget, you should break it down into two aspects, your overall overheads, and then your cost per unit of whatever it is your factory produces.
To work out your total factory overhead costs for each business year, you need to estimate all the costs that are likely to arise. To calculate unit cost, you should take that total annual figure and divide it by how many units you expect to manufacture. You will then know how much it costs to produce each unit, and be able to calculate what you will charge for it, based on your overall expenditure and market forces. This is crucial, not only for your own profit margins, but in case you need to develop a business plan for any financial borrowing. No bank or financial institution will consider you for any kind of business loan unless you provide these figures.
