Overhead or Indirect Cost Allocation in the home workshop
If you are running your woodshop for revenue, you need to know about overhead cost, or indirect cost.
Everyone knows about material cost, which are easy to see because those are used to make the item you are working on. Overhead cost are those items not easily seen. Let's start with a list of what 'overhead' or 'indirect cost' items are so you get an idea of what they really are, and to see how fast these 'little things' can add up in running your shop. The list below is just an example. Your list will vary depending on the kind or work, and supplies you use in your shop:
Electricity to run power tools, and for heating and cooling the shop space.
Supply of disposable different sized paint brushes for painting, staining and varnishing.
Supply of small drill bits that always break often when making pilot holes.
Supply of disposable rubber gloves, face and dust masks for working with chemicals and sanding dust, etc.
Supply of paint thinners, boiled linseed oil, mineral spirits, etc. for cleaning paint brushes, thinning and mixing paints, stains and varnishes.
Supply of sandpaper, machine sanding belts and dicks (various grits), steel wool and plastic steel wool pads consumed in making projects.
Supply of nails, screws and other hardware kept on hand for projects as needed - these are the hardware items that were on sale and you could not pass them up.
Supply of various paints, stains and varnishes kept on hand for production.
Supply of paper towels or rags used for paint and varnish removal, or wiping off excess wood stain.
Supply of dust filters for dust collectors, vacuum cleaner filters and air cleaners used in the shop.
Supply of machine oils and bearing grease for oiling and lubrication various power and hand tools.
Safety Equipment. These are extra smoke detectors, fire extinguishers and first aid kits purchased just for the shop.
The list above is just for the usual 'consumable' supplies in your shop. Good overhead cost allocation also includes a portion of the cost for larger power tools as well:
Length of time a blade will last in a table saw, band saw, jointer, router or shaper before sharpening or replacement is needed. Most blades today are carbide, and can be re-sharpened instead of being replaced. However, if you decide to re-sharpen them, the cost of re-sharpening should also be considered. In most cases, the re-sharpening removes more material from the blade or cutter than when it was new from the factory, making it more prone to chipping while in use, or making it more dangerous to use, as pieces of chipped carbide can cause accidents.
Time spent checking and adjusting power tools. Checking and adjusting tools can take some time. Estimate what your time is worth when you are in the shop adjusting or setting up the tools for a production run. .
Sharpening and maintaining hand tools. Even with power tools, there are times when simple hand tools are needed to complete a project. Estimate how much time you spend sharpening chisels, plane irons, cabinet scrapers, etc. Also include time for cleaning and oiling small hand tools like hand drills, etc. Also allow for the cost of sharpening supplies, like sharpening stones and grinding wheels, etc.
Replacement Reserve / Damage and breakage - accidents happen. Tools wear out. Grinding wheels break. You might want one of the newer table saws that stop if your fingers touch the blade. A heavy board dropped on a table saw can crack a cast iron table, or an old motor can burn out, swinging a large board around in a shop can break something, so make an allowance for replacing old tools and for damage or breakage for tools and other items in the shop.
Extra insurance. If your insurance company charges extra for having a home workshop, the extra cost should be included in your overhead.
Cost of wood patterns. wood templates and patterns may last a long time, but the usual experience is that when you try to sell the item, everyone else at the art show or other event is trying to do the same thing, and they have the same thing for sale, so after one or two batches of production, the patterns usually gather dust in a corner of the shop, along with the unsold items. Try to include the cost of making such patterns in early sales, so you can feel good about throwing the patterns out, or burning them in the wood stove on a cold winter night after their popularity and selling potential has passed. Consider donating the unsold items to charity for a tax deduction.
Once you get an idea of what your overhead application rate is, or how much you should add-on when when pricing a project for overhead or indirect cost, your shop will be more profitable because you are covering all of your costs of production.