How to Prepare a Basis of Estimates
Preparing an accurate basis of estimates allows your company to spread fixed and variable costs in a uniform manner. The basis of estimates will help you determine whether your company is making a profit on individual production pieces. This also allows you to bid competitively for projects and still yield a profit. Projects that cannot be manufactured at a profit can be declined. Preparing a basis of estimates to spread costs over manufacturing pieces can help you identify where costs need to be reduced to increase profits.
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Things You'll Need
- Itemized list of annual overhead expenses
- Depreciation schedule for assets, including building and machinery
- Annual cost of labor, including any expected changes
- Total man-hours, including expected changes
- Total actual machine hours
- Total potential machine hours
- Annual administrative costs
Instructions
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Add all annual overhead costs that you cannot apply directly to the individual products or goods your company manufactures. Examples of these costs include utilities, depreciation of the building, and administrative costs, such as non-production salaries, advertising and office supplies.
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Calculate the total man-hours to be used in production for the year. If employees work five days a week, eight hours a day, 52 weeks a year, the total annual man-hours for one full-time employee equals 2,080. If your company has 10 employees, you multiply 2,080 by 10 for a total of 20,800 man-hours. If your company uses a non-typical work week, calculate the man-hours for one employee and multiply that number by the number of employees.
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Calculate total machine-hours based on the actual time the machine runs, as well as each machine's capacity. This number is used for processes that use expensive or specialized machinery requiring little hands-on operation by employees. Examples include injection molding, stamping and electronics insertion machines. A company offering these services usually calculates separate costs to apply for each of these processes because of the differences in capacity and the cost of the equipment.
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Multiply total man-hours and total machine-hours by 60 for a total of man-minutes and machine minutes used in production. Basis of estimates are typically costs for one-minute increments.
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Divide the total of the overhead costs by the total man-minutes for a cost to apply for each minute of assembly. This cost is your basis of estimates. You may apply this cost to items or goods that your company manufactures based on how long it takes to manufacture one item. Machine-minute costs are applied based on actual or standard process time.
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Tips & Warnings
Attach details describing the method and dollar amounts used for your basis of estimates to make it easier to adjust for changes in costs or man-hours, and for auditing purposes.
Companies with similar operations may compare basis of estimates to make sure they are competitive.
If your company has very different processes, for example molding and painting, you should calculate a different basis of estimates for each process.
Refer to basis of estimates details when applying direct costs to avoid applying a cost twice to a product.
Estimating future costs too high can cause your company to lose bids for new products.
References
Resources
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