American Axle Strike Settlement Drives Tier 1 Labor Cost Inflation
The UAW contract at Three Rivers raises top wages 36 percent, signaling higher component prices for truck assemblers.
Manufacturing Overhead Costs
Operational Expense
Indirect costs associated with the production process that cannot be traced to a specific unit of output are tracked separately from labor and materials. Manufacturing overhead costs include the rent for the factory building, the utilities needed to run the machines and the salaries of the management team. These expenses are a major part of the total cost of goods sold and must be managed carefully.
Allocation Ratio
Determining how much of the indirect cost should be assigned to each product involves the use of specific formulas. In the management of manufacturing overhead costs, the total expense is often divided by the number of machine hours or direct labor hours used. This method ensures that each product carries its fair share of the factory’s operating costs.
Modern accounting systems provide real time data on these expenses, allowing managers to identify areas where waste can be reduced. A precise allocation is necessary for accurate pricing and financial reporting.
Capacity Utilization
Efficiency in the use of the factory and its equipment directly affects the cost per unit of the finished product. High manufacturing overhead costs are more easily absorbed when the factory is running at full capacity and producing a large volume of goods. When production slows down, the cost per unit rises because the fixed expenses like rent and insurance remain the same.
Managers look for ways to keep the machines running consistently and to reduce the time lost to maintenance and repairs. The ability to control these indirect expenses is a requirement for maintaining a competitive edge in the market.