Your Free Overhead Training fromMyOverhead.com | Lesson 4
If you missed Lesson 1: “Separate out your Expenses from your Profit and Loss Statement” you can click here to access it or type the URL below into your internet browser:
“https://app.myoverhead.com/free-overhead-training-lesson1-1-1/”
If you missed Lesson 2: “Total your Indirect Labor Costs” you can click here to access it or type the URL below into your internet browser:
“https://app.myoverhead.com/free-overhead-training-lesson-2-1-12/”
If you missed Lesson 3: “Count your Direct Labor Employees” you can click here to access it or type the URL below into your internet browser:
“https://app.myoverhead.com/free-overhead-training-lesson-3-1-23/”
We will be going over step 4 in this Lesson.
The five step process to calculate your overhead rate.
- Separate out your expenses from your profit and loss statement
- Total your Indirect Labor Costs
- Count your Direct Labor Employees
- Total your Direct Labor Hours
- Calculate your Overhead Rate
Lesson 4: Total your Direct Labor Hours
Direct Labor Definition: labor involved in production rather than administration, maintenance, and other support services.
Meaning direct labor refers to all employee who spend time working on tasks, projects or roles in the business that CAN be tracked back to specific service, production units or products. In other words, it is any work that can be billed to customers, goods or products.
For example, if you own an Auto Repair Shop and you have employees working on cars then those employees time are considered as Direct Labor Hours and should be counted.
Total all of your direct labor employee hours for the same year. It is important you total the direct labor hours worked but DO NOT include hours that are considered direct labor burden hours such as, holiday, sick or vacation hours. Labor burden hours need to be subtracted from the total direct labor hours for each employee AFTER you have identified the total direct labor hours for each employee.
In most small business employees tend to wear several different hats and can cross from direct labor to indirect labor. You should try and calculate as close as possible the total amount of time spent as a Direct Labor employee. Even if it is a small amount, because it will cause your calculation to be off and you will not have an accurate overhead cost per hour when finished.
For example, if the Auto Repair Shop above has an employee who works at the counter answering phones and also works in the shop on vehicles, then the time the employee works at the counter needs to be subtracted from the hours worked in the shop. The shop hours are considered direct labor hours for that employee.
Here are some examples of typical direct labor positions:
- Construction Workers
- Assembly Line Workers
- Delivery Truck Drivers
- Auto Mechanics
- Hair Stylists
- Chefs
- Line Cooks
- Accountant Workers
- Attorneys
- Doctors
- Dentists
Once you have all of your Direct Labor cost hours calculated for each employee, you will need add all the costs together and the total is your total Direct Labor Hours for your business.
If you have several employees that worked for even a week, the hours need to be counted.
Here is an example.
Annual Hours:
Employee 1 – 40 hours
Employee 2 – 2,000 hours
Employee 3 – 1,500 hours
Employee 4 – 300 hours
Employee 5 – 2,010 hours
Employee 6 – 1,800 hours
Annual Hours Total = 7,650 Hours
Other Hours:
Subtract Vacation Hours – 120 hours
Subtract Indirect Hours (If any for Direct Employees) – 510 hours
Subtract Holiday & Sick Hours – 192 hours
Other Hours Total = 822 hours
Formula:
(Annual Hours – Other Hours) = Total Direct Labor Hours
Total Direct Labor Hours = 7,140
Congratulations you have completed the fourth step in calculating your overhead.
I recommend you do these calculations every month or at least every quarter for your company.
With MyOverhead.com counting your Direct Labor employees and grouping them into divisions or groups is quick and painless and updating your information monthly can be done in minutes instead of hours. Give MyOverhead.com a try today by clicking the Get Started Now button below.
Thank you,
Mark Lallemand
MyOverhead.com
P.S. Next we will go over Lesson 5 in calculating your company’s overhead so keep watching for the next Free Training email.
