Calculate shop overhead, determine an overhead rate per productive labor hour, and allocate overhead to individual fabrication jobs.
Enter the recurring costs that support fabrication operations. Add your own categories where necessary.
| Overhead Category | Cost for Period | Allocation Type | Included |
|---|
Once the shop overhead rate has been calculated, enter a fabrication job's direct labor hours to estimate the overhead allocated to that job.
| Category | Examples | Typical Allocation |
|---|---|---|
| Facility | Rent, lease, property costs | Shop overhead |
| Utilities | Electricity, gas, water | Shop overhead |
| Equipment | Depreciation, leases, equipment finance | Shop overhead |
| Maintenance | Machine service, repairs, tooling maintenance | Shop overhead |
| Insurance | Property, equipment and general business insurance | Shop overhead |
| Administration | Office costs, accounting and management support | General overhead |
| Software | CAD/CAM, ERP and estimating systems | General overhead |
| Safety | PPE programs, safety equipment and training | Shop overhead |
| Cleaning | Waste handling and shop cleaning | Shop overhead |
| Other | Miscellaneous operating expenses | User defined |
Fabrication overhead represents the costs required to keep a workshop operating even though those costs cannot normally be assigned directly to one piece of steel or one welding operation.
For example, the electricity used by a particular welding machine may be difficult to track precisely for every job. Shop rent, insurance, maintenance and administration are even less directly attributable to individual parts.
An overhead allocation method distributes these costs across a practical cost driver, such as productive labor hours.
The simplest labor-hour allocation method divides the recoverable overhead by practical productive labor hours.
For example, if a workshop has $240,000 of annual recoverable overhead and 12,000 productive labor hours:
A job requiring 40 direct labor hours would therefore receive approximately $800 of allocated overhead under this simple method.
Using paid employee hours without considering utilization can understate the overhead rate. Employees may spend time on setup, material handling, cleaning, meetings, maintenance, waiting, training and other non-production activities.
The shop utilization field allows the calculator to reduce nominal labor capacity to a practical productive-hour figure.
For a detailed costing system, use actual historical productive hours whenever available.
After calculating the hourly overhead rate, a simple job allocation is:
This approach works best when labor hours are a reasonable driver of shop resource consumption. A highly automated CNC operation may be better allocated using machine hours, while a labor-intensive fabrication shop may be well suited to labor-hour allocation.
Labor hours are not the only possible allocation basis.
The best method depends on how the shop actually consumes resources.
Some overhead costs remain relatively stable as production changes, while others vary with activity.
Rent and insurance are examples of relatively fixed costs. Electricity, consumables associated with equipment use and certain maintenance costs can vary with production.
Separating fixed and variable overhead can provide a more accurate costing model for shops with significant production fluctuations.
An overhead rate is useful only if the business actually recovers enough overhead through its work. If actual productive hours fall significantly below the estimate, the planned rate may not recover the shop's total operating costs.
For quotations, compare expected utilization with actual historical production and periodically update the overhead rate.
What is fabrication overhead?
It is the cost of operating and supporting the fabrication shop that is not directly assigned to a specific material or production task.
What should be included in shop overhead?
Common categories include rent, utilities, equipment costs, maintenance, insurance, administration, software, safety and general operating expenses.
How do I calculate overhead per hour?
Divide recoverable overhead for the chosen period by practical productive labor hours for that same period.
Why shouldn't I use total paid hours?
Paid hours include time that may not produce billable or productive fabrication work. Using practical productive hours usually gives a more realistic recovery rate.
Can overhead be allocated to one job?
Yes. Multiply the job's applicable cost-driver hours by the calculated overhead rate.
Should machine-heavy jobs use labor-hour overhead?
Not necessarily. Machine hours or a machine-specific rate may be more appropriate when equipment usage is the major overhead driver.
How often should an overhead rate be updated?
Review it whenever major costs, staffing, equipment, rent or production capacity change, and periodically compare the estimate with actual results.
Can this be used for fabrication quotations?
Yes. The calculated overhead rate can be incorporated into job costing, but it should be combined with accurate material and labor costs and the business's normal pricing method.