Overhead For Already Owned Equipment?
Business By experimenting Updated 28 Sep 2012 , 10:44pm by experimenting
Hi everyone,
I'm currently working on my pricing (haven't opened for business yet) and am trying to figure out my overhead. I have a few questions:
- How do you estimate how long a piece of equipment should last you? If I buy, say, a new mixer or pans and want to work it into my overhead, don't I need to know how long I expect it to last? The "life" might be 5 years for the mixer, so divide the price of it by how many orders, on average, I estimate to get per week over those five years... but, where do I get the estimated "life" of the mixer?
- What about equipment you already own? I'm starting off small and working from home and will be using some equipment that I already own. Do I try to work these into my overhead and just prorate?
- What about equipment you buy later, whether it's replacing old equipment or just buying new "toys"? How do you account for these without constantly changing your selling price? Or do you just adjust your prices regularly every year, or every few years?
TIA!!
- How do you estimate how long a piece of equipment should last you? If I buy, say, a new mixer or pans and want to work it into my overhead, don't I need to know how long I expect it to last? The "life" might be 5 years for the mixer, so divide the price of it by how many orders, on average, I estimate to get per week over those five years... but, where do I get the estimated "life" of the mixer?
Generally the IRS recommends using a 10 year useful life for "other" equipment (like mixers), 8 years for furniture, and 3 years for personal computers. This recommendation is for depreciating capital assets, but you can still use these estimates to figure out overhead for non-capital expenses.
- What about equipment you already own? I'm starting off small and working from home and will be using some equipment that I already own. Do I try to work these into my overhead and just prorate?
I would prorate, so your business is essentially buying the equipment from you at the original purchase price less depreciation. Then you would incur overhead expense based on the remaining life of the asset.
- What about equipment you buy later, whether it's replacing old equipment or just buying new "toys"? How do you account for these without constantly changing your selling price? Or do you just adjust your prices regularly every year, or every few years?
If you are replacing old equipment your allocated overhead should not change unless the new equipment is more expensive, in which case your costs would increase. Buying new non-replacement equipment will also increase your overhead costs. I don't think it's necessary to immediately adjust prices when this happens, but you should reexamine your pricing structure once a year or so and increase prices accordingly.
If the new equipment comes with an increase in productivity you may not need to increase prices at all (based on the new equipment purchase at least) if the decrease in labor cost is greater than the additional overhead.
Inflation rates in the US are currently averaging 2.5% a year so your prices should be increasing by at least that much, otherwise your prices will be dropping in real terms.
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