1. + Budgeted Hourly Rates Creating your own cost centers and BHRs

2. Learning Goals After completing the activities in this slideshow lecture you should be able to… 1. Define Budgeted Hourly Rates (BHRs) 2. Identify cost centers involved in creating a BHR 3. Create a systematic approach to creating a BHR 4. Establish a working BHR for yourself

3. What is a Budgeted Hourly Rate? What is a Budgeted Hourly Rate (BHR)? A Budgeted Hourly Rate is a fixed rate charged for a service per hour. It is not a random or guesstimated number. It is an exact cost that is calculated to incorporate all variables associated with a particular operation. Many things can have associated BHRs. For example, a printing press, a graphic designer, and delivery truck will all have their own separate BHRs. These BHRs will incorporate all the costs associated with their operation over a year’s time (car maintenance, computer costs, etc…)

4. How are BHRs used? A BHR is not the only cost that must be accounted for when generating pricing for a job. BHRs are combined with other material costs to create the total price for a portion of a job. For example, it may take 6 hours to run a job on a printing press. When we generate pricing for this job we charge the customer 6 hours x the BHR for the press plus the cost for the exact amount of materials it takes to complete their job. These costs are the total price for the ‘run’ portion of a job.

5. How are BHRs used? Job Run Costs Job ‘RUN’ costs are the costs associated with printing a particular job. The run cost incorporates all costs from when a job leaves the prepress department up until printed sheets come off the back end of a printing press. Items that must be accounted for when developing run costs include: Plates (a minimum of one for each color) Paper and Ink # of hours a job will be on the printing press Setup and wash up times and whatever other costs a company might incur while a job is on the printing press

6. How are BHRs used? Job Run Costs: $400 for printing plates $1750 for paper $75 for ink $500 to setup the press (1 hour to setup the press at $500/hr ) $3,000 to run the job (6 hours on press at $500/hr) $500 to clean up or ‘wash-up’ the press (1 hr at $500/hr) $6,225 (total cost to run the job on press) $500 is the BHR for this particular printing press. These ‘RUN’ costs would then be added to the costs to perform prepress operations, binding and finishing costs, and shipping costs, etc… to calculate the total cost for this particular printing job. This section is $6,225, but the total cost to complete the entire job may end up being more like $17,000.

7. Identifying Cost Centers We identified cost centers in our daily lives during the Cost Centers Quiz. These same cost centers are used to calculate BHRs. The only difference between what we did for homework and what a company does to establish a BHR is how the items are organized. To create a BHR, we must group cost centers together. For example, to establish a working BHR for a printing press we must group all fixed and variable costs associated with that press for an entire year together. Once we know how much it will cost to own that press for one year we can break it down into an hourly rate. We do not include customer specific variable costs when creating a BHR. These costs, like paper and ink, are strictly dependent on how many jobs are sold, the colors of ink, and the type of paper a customer wants. We charge these as additional costs as jobs are booked.

8. Identifying Cost Centers Let’s identify all cost centers required to own a press for one year. These are all of the costs we will pay to own the press whether we print 1 million jobs or 0 jobs. 1. Our press has a $3,500 monthly lease payment ($3,500 x 12= $42,000) 2. We pay $625 per month for press insurance ($625 x 12= $7,500) 3. Our average monthly electric bill last year was $900 ($900 x 12= $10,800) 4. Last year we spent $7,000 on maintenance ($7,000) The total cost we should expect to pay for this press for 1 year of operation is $67,300. As a company, we need to incorporate these costs in every job that we price for clients.

9. Identifying Cost Centers The BUDGETED HOURLY RATE for this printing press can be calculated by dividing the total cost to operate it for 1 year by the number of hours it will be used in 1 year. What is the BHR for this press if the printing company will run the press for 300 hours in the year? $67,300 ÷ 300 hours= $224.33/hr What would the BHR be if the company decided to run a second shift and the press is operated for 600 hours in the year? $67,300 ÷ 600 hours= $112.16/hr

10. Creating a BHR Steps for Creating a BHR 1. Identify all cost centers involved in a particular operation (Our example were the costs required to run a printing press, but it can be any segment of the production process.) 2. Calculate the yearly cost of these cost centers (Multiply by 12 if it is a monthly cost.) 3. Decide how many hours per year your operation (press) will be used (This is never a set number. It must be calculated based on information that is provided to you.) 4. Divide the yearly costs by the number of hours per year your operation (press) will be used to establish an hourly price (BHR) (Total Cost for 1 year ÷ number of hours it will be operated in 1 year= $BHR )

11. Creating a BHR Creating a BHR (EXAMPLE) 1. Cost centers involved in running a printing press include lease payments, insurance, estimated electric bill, & estimate maintenance (to name a few) 2. Total yearly costs for those cost centers= $67,300 (we established this on slide 8) 3. If we run 1 shift per day (8 hours) for 5 days each week (52 weeks in a year) we will run the press for 2,080 hours each year 4. $67,300 yearly cost center costs ÷ 2,080 of operation each year= $32.36/hr The BHR for this particular printing press would be $32.36/hr. (if we ran the press for 2,080 hours in 1 year)

12. + What’s Next? Creating a BHR (HW) Creating a BHR (Q)