Custom Metal Fabrication Series Part 4: Burden Labor
By definition, a manufacturing company’s burden rate is the allocation rate at which indirect costs are applied to the direct costs of labor or inventory. In essence, this helps custom metal fabricators calculate the total absorbed costs of the items they produce. Not only will this include operator salaries, but also the salaries of management and engineers that design the process or manage a project.
Why Is Understanding Burden Costs Important?
Burden costs are notably separate from direct labor costs, which are those costs immediately and consistently associated with the manufacturing of a product. Operators, of course, would constitute direct labor costs.
Still, direct costs of manufacturing alone, labor or otherwise, don’t paint the full picture of how much a product will actually cost to manufacture. While manufacturers or other businesses might survive if they can sell at high margins, they will quickly run into issues as competition drives those margins down or company growth continues to increase fixed overhead costs. This is one of the primary motivations for OEMs to take advantage of contract manufacturing.
Calculating Labor Burden
For all employees, calculate burden by doing the following:
- Calculate employee hourly wages (include potential vacation/sick days)
- Determine your business’ expenses less the costs of labor
- Multiply the number of days per year your employees are expected to work by the hourly wage
- Divide the previous calculation by the actual hours worked per year
Manufacturing Overhead and Inventory Burden
Manufacturing overhead costs must include both the direct labor (which could include time of machine use) and direct material costs to give the total cost of a manufactured product. Calculating the burden of inventory is simply dividing the overall manufacturing overhead by the cost of activity (labor and capital equipment).
While direct costs of manufacturing are typically the motivating factor for internal decisions, understanding factory overhead — or burden — gives businesses more context to make even more informed choices.