Knowing what your true hourly rate is, in order to cover your overheads and expenses, gives you a clear path to business control, growth and potential profit.
It all starts with your Cost Centres.
Aside from making up the basic framework and substance of a business, and being the basis for creating a profit, cost centres are what we use to determine hourly rate.
A Cost Centre is used to break-up the business into measurable portions in order to determine if that portion is profitable. A Cost Centre could be your design team, your delivery fleet, or your expensive machine that fills one third of your factory floor. The reason we break up a business into Cost Centres is to better identify and isolate variables to determine how efficient they are, so that we can make specific improvements that are not guesswork. This is less overwhelming than trying to improve efficiency as a blanket rule across the entire business.
The Cost Centre setup is a key part of using the Estimating module accurately. This ensures that overhead costs and production costs are covered in every Estimate so that all business costs are covered.
Hourly rates are calculated by:
Main menu > Setup > Cost Centres > View
Main menu > Setup > Cost Centres > New/Edit
7. Totals - This section shows the various calculated and fixed totals of the Cost Centre.
8. Overhead Fix check box - Functionality is provided to override the Overhead allocation. To override the Overhead, check the Fix check box and enter the fixed Rand value you wish to allocate to this Cost Centre. If the Overhead allocation is fixed in one Cost Centre, the automatic allocation on all the other Cost Centres will be changed, so that the total Overhead allocation remains at 100%.
9. Hourly rate Fix check box - Functionality is provided to override the calculated Hourly rate. To create a fixed Hourly rate, check the Fix check box and type in a Rand value for the Hourly rate. This will also automatically calculate and reflect the Adjustment for that Cost Centre.
10. Recovery panel - This displays the actual productivity and income generated from a Cost Centre. The graph on the left is a visual representation of work allocated against that cost centre.
11. 12 Month History - The 12 Month History on the right shows a month-by-month overview of Total Hrs and Total value for the Cost Centre. Over time this can show you clearly if you need to adjust the Production values to reflect how long and often the Cost Centre is actually being used. This, in turn, will adjust the hourly rate to show a more accurate running-cost value for that Cost Centre, and ensure the expenses of that Cost Centre are covered.
A business has direct and indirect costs, and these require two different types of cost centres.
The Overheads, or indirect costs, include costs that are not directly recoverable from the sale of a product or a service. These include costs such as admin salaries, rent, electricity, etc. Essentially the 'expenses' from the Income Statement less the production salaries.
These expenses can be added to the Overhead Cost Centre individually or as a combined total. For ease of maintenance, it is recommended to enter the combined total.
All the costs in the Overhead Cost Centres are automatically added to Production costs.
Here is a step by step guide on how to create an Overhead Cost Centre:
7. Enter the total monthly amount.
8. Click Save to finish the Cost Centre.
When considering how to cover Overhead costs, there are two models that can be implemented.
The first approach - as above - splits the Overhead costs across the business's Cost Centres, and includes them in the hourly rate. This ensures that every estimate and quote covers a portion of your Overhead expenses.
Alternatively, Overheads can be excluded in the hourly rate and added as an Adjustment or markup in the Cost Centre module, or in the Estimating module.
The cost of services is calculated by dividing the business into production centres. Direct and indirect costs are then allocated to each cost centre. In this model, direct costs include equipment costs, maintenance and labour. The monthly costs are totaled and the hourly rate is calculated by dividing the monthly cost by the productive hours of the Cost Centre.
Here is a step by step guide on how to create a Production Cost Centre:
See image below for an example of a printing type Cost Centre:
Determining the hourly rate depends on the productivity within a Cost Centre. Knowing how many productive hours are available for work to go through that Cost Centre will help you determine what each hour should cost.
To calculate the productive hours per month (which you will use to calculate hourly rate) take weeks per year, multiplied by hours per week, divided by 12. Or:
Hours per month = (weeks per year x hours per week) / 12
Note: Be attentive when it comes to your productivity calculation; not all cost centres are as productive as the next. If after a while you notice a cost centre only sees 20 hours of work a week for example, then the calculation will reflect a higher hourly rate. Initially you may have to do some thumb-sucking to start the ball rolling; feel free to use these values (above) for your baseline productive hours as a start. Alternatively, BOS shows you monthly Cost Centre recovery so that you can adjust productivity accordingly.
To determine your hourly rate, total your monthly costs (equipment, maintenance, labour) and divide this by the productive hours of the cost centre, or:
Hourly rate = monthly cost / hours per month
This is the sum of all admin/non-production/indirect costs.
A cost centre mainly has three costs, eg. Equipment, Labour (direct labour) and maintenance
When setting up a cost centre, QuickEasy uses a built-in repayment calculator but is fixed to calculating repayments over five years at 15% for large equipment and three years at 15% for electronic and vehicles. However, the monthly cost can be setup manually.
We also require the user to input the extended production hours and weeks. Many misunderstand this as it is not the total working hours but the expected hours you will bill. For a press, we normally set the hours per week to 30 and weeks per annum to 48.
In the long run,we can then compare the time and cost actually invoiced to these figures, which gives the user an indication of which machines are recovering, and which are not.
Hourly Rate = Total Monthly * 12 months / Productive Weeks / Productive Hours
Rate = R18 750 * 12 / 48 / 30 = R156.25
Hourly Rate = Total Monthly * 12 months / Productive Weeks / Productive Hours
Rate = R56 250 * 12 / 48 / 35 = R401.79