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Overheads & Indirect Costs

Overheads represent the indirect costs of running the manufacturing business that cannot be directly attributed to a single part or operation but must be recovered through the selling price.

Categories of Overheads

CostEngine categorizes overheads into three primary buckets:

1. Plant/Factory Overheads

Costs associated with the production facility. - Rent, utilities (power, water), taxes. - Maintenance and repairs. - Factory supervision and indirect labor.

2. Administrative & General (A&G)

Costs of running the front office. - Salaries of management, HR, Finance. - Office rent, supplies, software licenses. - Professional services (legal, accounting).

3. Sales & Distribution (S&D)

Costs to acquire customers and move product. - Marketing, sales commissions. - Logistics management (not direct freight). - Warehousing for finished goods.

Allocation Methods

CostEngine supports three primary mathematical methods for applying overheads to a quote:

Method A: % of Conversion Cost (Labor/Machine)

Most common for job shops where overhead relates to machine time.

\[ \text{Overhead} = \text{Total Operation Cost} \times \text{Overhead %} \]

Method B: % of Total Manufacturing Cost

Used when material and process are balanced.

\[ \text{Overhead} = (\text{Material} + \text{Operations}) \times \text{Overhead %} \]

Method C: Fixed Rate per Piece

Simple flat fee.

\[ \text{Overhead} = \text{Fixed Rate} \times \text{Quantity} \]

🔒 Governance Rule: Single Model per Version

To ensure mathematical stability and prevent "Double Counting" of indirect costs: * Rule: Only one overhead model (Method A, B, or C) can be active within a single Costing Version. * Switching: If a user switches from Method A to Method B, the previous overhead values are wiped and recalculated. * Transparency: The active method is explicitly saved in the version metadata for audit replay.

The "Indian MSME" Pattern

Many specialized manufacturers in India use a tiered overhead approach: 1. Consumables: 2-5% of Operation Cost. 2. Rejections/Buffer: 2-3% of Total Cost. 3. General Overhead: 10-15% of Conversion Cost.

CostEngine allows defining these as Global Defaults that can be overridden at the quote level.

Impact of Batch Size

Since Administrative overheads (RFQ processing, documentation) are often fixed per order, they significantly impact small batch sizes.

System Behavior: If Min Administrative Charge is defined as ₹5,000: - Batch of 10: ₹500/piece overhead. - Batch of 1000: ₹5/piece overhead.

Explainability

Users can see exactly how much overhead is being absorbed by a part:

Overhead Allocation: ₹42.50
├─ Factory Overhead (15% of Op Cost): ₹35.77
├─ Admin & Sales (2% of Total): ₹10.58
└─ Scrap Handling Surcharge: ₹2.15

Note: "Standard plant overhead applied. No customer-specific discount."

Configuration

Overheads are configured in Settings > Costing Parameters:

Name Method Value Scope
Factory OH % of Conversion 12.0% Global
Export Documentation Fixed ₹2,500 Per Quote
Quality Lab % of Total 1.5% Aerospace Parts