eCabinet Systems includes a sophisticated system for estimating costs, however, to use it you must define your shop costs and select the cost estimating method you want to use. This information is defined in Settings/Preferences - /Define Costs.
Cost is defined by three categories, material, labor and overhead.
Material is calculated by the system using material costs you enter in the Define Materials area adjusted by factors you set here. Material cost also includes any hardware or other components associated with cabinets in the job. These are valued at the cost at which they can be purchased through the program. Again, these costs can be adjusted to reflect additional factors.
The software offers two methods for estimating labor and overhead. One approach uses the ratio of your labor and overhead to material costs in the past and applies this ratio to future jobs. The second approach requires that you assign a number of labor hours to each cabinet and you assign a cost per hour to each category of labor.
The approach you decide to use depends on your shop and how consistent your product line is. If you build a more or less standard product line where the ratio of material, labor and overhead is about the same for all jobs, the standard cost system based on ratios will work well. If, on the other hand, you build a large variety of different products whose material and labor content varies widely, you should use the cost system based on hourly costs.
This area is vital to consistently making a profit and it is worth the time needed to analyze and understand how each approach works. Although there is some effort required to set up the initial data, once it is set up, developing a detailed cost estimate for a new Job is almost totally automatic. Because of its importance, we will cover this area in some detail.
There are three primary components to cost, Material, Labor and Overhead. If you add Profit to the sum of Material, Labor and Overhead, you get the Selling Price. If you take the Selling Price and subtract Material, Labor and Overhead you get Profit.
This is the basis for all accounting systems. Each of these areas, Material, Labor and Overhead, can be sub-divided and categorized to an almost incomprehensible degree, but every manufacturing company, from a small cabinet shop to the largest multi-national, strive, through their accounting systems, to determine Material, Labor and Overhead. As we work to understand our finances, keep this simple fact in mind. Now let’s look at how we can handle each of these areas using eCabinet Systems.
The finance system within eCabinet Systems is not used to track actual cost, but instead is used to estimate the cost (Material, Labor and Overhead) of new jobs and help you determine a Selling Price that assures you of the Profit you want. This Selling Price then provides guidance for quoting and selling the job.
The more accurate your ability to estimate job cost, the more competitive you can be in the marketplace while assuring yourself of the profit you need to stay in business.
Your Material Cost includes wood based material, sheet stock, board stock and banding which you will process, other wood parts such as doors, drawer fronts and moldings, which you may or may not process, as well as components such as pulls, slides, hinges and other fittings which you purchase and use.
eCabinet Systems determines Material Cost by calculating how much material will be required to build the product, including the cost of cut-offs and scrap you need to throw away and then adding the cost of other components and material you need to purchase for the job.
The purchase cost of hardware and fittings are the cost at which you can purchase each item through the program, and as such are accurate. There are software features that allow you to adjust these numbers for the reality of your actual cost and as a result, Material Cost estimates generated by the software can be quite accurate.
Next comes Labor and here is where you must make a choice. Unlike Material which can be very accurate, estimating Labor is a less accurate science. Even building the same cabinet can take more labor one time than the next, so labor estimates are just that, estimates.
Since Labor is going to be an estimate, we need to determine how we want to generate this estimate. eCabinet Systems offers two different ways to estimate Labor for a job. You must choose one or the other.
The first method is based on Material Cost, which we have already established is accurate. For most shops that build a consistent product line, the ratio of Labor Cost to Material Cost is fairly constant. For example, for every dollar of Material Cost it may require eighty cents in Labor Cost. This ratio of eighty cents Labor for every dollar of Material can be used to estimate Labor Cost for new jobs.
This approach will work well, if the ratio is fairly consistent across the product line. The ratio will be consistent if the product line is fairly consistent. This means that the basic material, construction methods and purchase items are pretty well the same for every job.
The ratio, however, is an average and averages can get you into trouble. If Labor is 120% of Material on one job and 40% on another, the average Labor Cost is 80%, but if you use 80% you will have problems. On the job with the lower Labor Cost you will price the job too high and possibly lose it. On the job with the high Labor Cost you will under price the job but will either have reduced profit or lose money.
As a general rule, if the Material-Labor ratio from job to job or from month to month stays within a 5% or so range, this approach will work and only requires that you establish the correct ratio. If not, you will need to use the second approach to estimating Labor Cost and that is to estimate the actual number of labor hours that will be required for each cabinet.
Using this second approach, you assign a cost per hour for one or more labor categories and then assign a specific number of labor hours to each cabinet in your library.
Some shops simply use Shop Hours. You can assign a cost per hour for Shop Hours and then assign a certain number of Shop Hours for each cabinet. If different jobs in your shop have different labor rates, you can use more than one category, assigning a different rate and a different number of hours for each category on each cabinet. In this way you can make these estimates quite accurate.
This information becomes part of the cabinet file. When a job is assembled, the system adds together the total labor hours associated with all the cabinets in the job and multiplies it by the cost per hour. The sum of the labor cost for each of the labor categories that you established is the estimated labor cost for the job.
The accuracy of this second approach depends on your ability to estimate the number of hours that will be required in each category and to accurately determine the cost per hour. It requires more effort to establish and maintain but can accurately estimate labor costs for shops that build a variety of different products that have different material-labor ratios.
The final category, Overhead, is not quite as straightforward as Material and Labor. Material and Labor are both, what accountants call, Variable Costs. This means they vary with the level of production. If you build twice as much, you will use twice as much Material and twice as much Labor.
Overhead, on the other hand is a Fixed Cost. Your cost for rent, power, insurance, bookkeeping, and all the other Overhead expenses is essentially the same each month regardless of how much you produce. This makes it difficult to assign an Overhead expense to a particular job because Overhead isn’t a cost actually associated with building the product, it is a cost associated with running your business. Nonetheless, we must find a way to account for Overhead expense in order to properly estimate the cost of a job.
As with Labor, we offer two ways to estimate Overhead cost for a job. Both methods estimate Overhead expense at a certain level of production. The easiest way is to use recent history and assume the immediate future will be like the recent past. This works provided you routinely recalculate the factors used in determining Overhead.
The first method we can use to estimate Overhead is by using historical ratios. When you select historic ratios to calculate Labor, this method is also used to calculate Overhead. Using this approach, we determine the ratio between Overhead expense and Material Cost and apply that ratio to the Material Cost of new jobs. If Overhead has been 25% of Material Cost for the last three months, we can assume it will be 25% of Material Cost for the next job.
The second method of estimating Overhead is using the concept of Overhead Hours. In this method, you divide the overhead for a month by the average number of hours you work each month to determine an Overhead Cost/Hr. Essentially this is how much you need to add to the cost for each hour of labor to pay for all your Overhead.
The system then multiplies this Overhead Cost/Hr by every hour assigned to the cabinet, regardless of the category, and calculates the Overhead Cost associated with this cabinet.
There is another category of expenses that accountants use called General Administration and Selling Expense. This is the cost for management, clerical help, advertising, and other expenses not directly used to produce a product. For our purposes, we will make these General Administration and Selling Expenses part of Overhead and handle all expenses that are not either Material or Labor as Overhead Costs.