Introduction To Shop Rates

Labor used to produce products and services purchased by customers. These man-hours are directly attributable to customer activity. A few years ago before computers, excel spreadsheets and calculators most organization used a standard shop rate for any labor that was occurring during a process.   Now that computers can easily calculate figures organizations have become much more accurate in trying to capture their true shop rates.  For the next few weeks in this blog I'm going to cover some of the details regarding shop rates and their affect on quoting and estimating. In order to make a profit when running a business, you will need to determine what fees to charge. The general way to determine the fees is to allocate the overhead cost to each machine on top of the actual labor costs.  Many times shop labor rates are thought of as how much an hour can I charge to perform a task. This is basically true but shop rates can be broken down into many sub categories, i.e.  setup rate, cycle time rate, direct labor rate, overhead absorption rate and others.   I will begin by defining some terms that will be used. When quoting you need to know what your shop rates are and how to calculate them. The two basic shop rates you will need to determine are your Cost and Sell as hourly shop rates.   You will also need to calculate this for every machine in your business because each machine may have different shop rates depending on costs and expenses required to run the machine.  Lets not forget there may be a different ship rate for both setup and cycle time.  Each machine may have a different setup vs cycle time rate because of various factors like electricity or gas usage and consumables usage during the cycle time vs the setup time. You should think of this blog as an online cost estimating class or course where we are going to review all the different areas regarding cost estimating.   Job cost estimating software will help you with these calculations.