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Figure Shop overhead

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Forum topic by fRANKIEB21 posted 03-19-2013 02:09 PM 809 views 0 times favorited 6 replies Add to Favorites Watch
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fRANKIEB21

4 posts in 2372 days


03-19-2013 02:09 PM

Hi All
I’m an amateur woodworker who has joined in a partnership with one other woodworker to make and “sell” redwood potting benches. Most if not all of the work will take place in my shop. I would like to come up with a way to compute my shop overhead. I was thinking of basing it on the hours spent in the shop. Any ideas on what hourly rate to use or any other ways to handle this situation

Thanks in advance
Frank


6 replies so far

View Lee Barker's profile

Lee Barker

2163 posts in 1503 days


#1 posted 03-19-2013 03:41 PM

Hi Frank—

I applaud your businesslike approach. I’ll have a somewhat lengthy response. My apologies in advance.

First of all, partnerships are like romance—they start out starry eyed and that can go away in time. Natural changes in life can alter circumstances. My most important piece of counsel is to write out the divorce papers first. Sounds harsh, but put it this way: “If things change and we stop doing this, wouldn’t it be best if we knew in advance how we were going to divide up the assets and liabilities?”

Ok, now to your nuts and bolts question.

In simplistic language, your overhead is what you must pay to keep the door open and the lights on.

electricity
heat
phone
waste disposal

insurance (liability esp. since you’ll have someone else there)
licenses, etc.

glue
fasteners
paper towels
finish
personal safety protection

tool maintenance, incl. sharpening services
tool replacement

Though some of these may seem miniscule, you must apply a value to each one.
(I may have forgotten some things here; I hope there are others who can amplify this list.)

The math here is to figure these costs for a month and extrapolate to a per hour number.

I hope this gets you started.

Kindly,

Lee

-- "...in his brain, which is as dry as the remainder biscuit after a voyage, he hath strange places cramm'd with observation, the which he vents in mangled forms." --Shakespeare, "As You Like It"

View Bill White's profile

Bill White

3451 posts in 2613 days


#2 posted 03-19-2013 04:08 PM

Is the shop free standing, sep. elec. meter, etc?
Do you have a good inventory of your equip. with relative values?
A close record of a month’s supplies used?
Detailing all the expendables used in a month/utilities, and last, hours worked to calculate “payroll.
All these will give ya a pretty good idea of fixed costs.
Add to those figures the costs of materials used (may vary based on work load).
Taxes and insurance costs are also a “fixed” expense.
Then there’s phone, fax, advertising if any.
These numbers can give ya a way to calculate a daily “cost” rate of shop operations.
I try to calculate 1/3 of a price for sales based on costs of operation, 1/3 cost for specific materials dedicated to the job, and 1/3 profits.
Just my “barnyard” pricing system.
Bill

-- bill@magraphics.us

View crank49's profile

crank49

3421 posts in 1624 days


#3 posted 03-19-2013 05:29 PM

Everyone can have a different cost basis and so much depends on your shop situation that would be totally different from the next person.

Lee’s suggestion about the “divorce papers” is spot on and is a pre-requisite for going forward.

If you know what your product should sell for, based on comparable products, you should be safe to assume the cost of materials must be no more than 25% of that selling price.

The cost of overhead can be sometimes figured as a % of your house. For example, if you live in a 3000 sq ft house and have a 600 sq.ft. shop, then you could say 20% of the mortgage, 20% of the utilities, 20% of the insurance and taxes (if they are not included in the mortgage), etc. are the fixed costs of the shop. I questioned my tax attorney about this once and pointed out I don’t spend 20% of my time in the shop, but she said it makes no difference. The space exists for that purpose 100% of the time.

-- Michael :-{| “If you tell a big enough lie and tell it frequently enough, it will be believed.” ― A H

View joeyinsouthaustin's profile

joeyinsouthaustin

1255 posts in 725 days


#4 posted 03-19-2013 05:35 PM

here are some resources I used when writing my first business plan, and current partnership agreement.
article on partnerships

partnership checklist

I can also send a copy of a sample business plan if you pm your email address that was helpful in leading through the topics discussed above. PLus check out your states local Small business administration (SBA) for more help.

I have liked this site as well for other idea’s about business.

-- Who is John Galt?

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mtenterprises

827 posts in 1346 days


#5 posted 03-19-2013 09:06 PM

Partnerships…. blauk. In my opinion the suck. Did it with my brother years ago and it didn’t work out. I’d rather have an employee. (better yet an old fashoned apprentice, the type you train and don’t pay $$$$ to). So in this case for warned is for armed. As far as I’m concerned it don’t work. As for the other, shop overhead what the others have said is quite good but make sure you have a shop overhead list that doesn’t include project consumables. Shop overhead is the building or shop space, utilities, insurance, advertisment. Things like sandpaper, glue, finish are project consumables. Personal safety protection is PERSONAL. Example ear plugs are disposable and a continued cost where hearing protectors are a one time personal cost (of course you may replace these evry few years). The same with safety glasses these are a personal choice, what type is best for you. For me it’s perscription safety glasses with top and side shields. If a person purchases their own they take better care of them and last longer.. So now take all the info here given shake it up, toss it out on the table, and see what kind of list fits your needs.
MIKE

-- See pictures on Flickr - http://www.flickr.com/photos/44216106@N07/ And visit my Facebook page - facebook.com/MTEnterprises

View fRANKIEB21's profile

fRANKIEB21

4 posts in 2372 days


#6 posted 04-06-2013 06:23 PM

Hi and thanks to all that responded.
Special note to Lee about “divorce papers”!!!
I teamed up with someone that I knew casually thru our local woodworking club and had not worked very much with.
Well it didn’t take very long to discover we were totally mismatched and this joint effort was not going to work out.
Thankfully the divorce went well and we both went our separate ways.

Frank

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