If you're a business owner, you know that overhead costs are necessary for doing business. But what are overhead costs, exactly? And how do you calculate them? In this blog post, we'll answer those questions and give tips on keeping your MOH as low as possible. Stay tuned!
What Is Manufacturing Overhead Cost?
As a business owner, you need to track your manufacturing overhead cost (MOH) to understand the expenses associated with manufacturing your product. MOH includes indirect costs such as rent, utilities, and insurance for your factory or production facility. It also includes labor costs for indirect workers such as supervisors and quality control personnel.
You need to know your MOH because it will impact your profits. If your MOH is too high, it will eat into your profits. On the other hand, if you can keep your MOH low, you'll be in a better position to price your product competitively and make a healthy profit.
How Do You Calculate Manufacturing Overhead Costs?
The formula to calculate manufacturing overhead cost equals indirect labor cost plus indirect materials plus indirect overhead cost. Therefore, MOC=IDL+IM+IOC
Indirect labor cost: It is the cost of salaries and benefits for indirect workers such as supervisors, quality control personnel, and maintenance staff.
Indirect materials: These are the costs of materials used in the manufacturing process that are not directly attributable to a specific product. For example, this would include glues, oils, and lubricants.
Indirect overhead cost: It is the cost of overhead expenses incurred during the manufacturing process. This would include rent, utilities, and insurance for your factory or production facility.
Examples: Your factory rents for $2,000 per month, your monthly utility bill is $1,500, and your insurance policy costs $500 per month. This would give you a total indirect overhead cost of $4,000.
If your indirect labor cost for the month is $3,000 and your indirect materials cost is $1,500, then your total manufacturing overhead cost for the month would be $4,000 + $3,000 + $1, 500 = $8,500.
Factors That Can Impact Manufacturing Overhead Cost
Several factors can impact your manufacturing overhead cost. These include:
The size of your production facility
The size of your production facility determines your manufacturing overhead. The more complex it becomes to operate and maintain a business - in terms of money and the number of employees needed - the higher the rent for space and services will become. This will help the company stay profitable, so you don't need to worry if things get tough this month. You planned for this!
The type of product you're manufacturing
To keep your production costs low, you must ensure that the materials and equipment needed for each different type of product are available. If not, it will be more expensive than necessary, leading to a higher manufacturing expense (MOH).
Related: The Ultimate Guide to Manufacturing vs Distribution
The location of your production facility
Your MOH is based on the location of your production facility. If you're in a high-cost area, that will mean higher benefits for employees and lower premiums with more rigorous standards to meet too!
The labor market in your area
Compensation for employees in your area can help determine the total cost of production. When you are looking for new markets or expanding current ones, it is important to know what people are making in those markets. This will help you find growth opportunities, like high-paying jobs that offer greater earning potential than other types of employment in the market but require fewer hours per week (or even part-time).
Ways To Reduce Or Control Manufacturing Overhead Cost
You can reduce or control your manufacturing overhead cost in several ways. These include:
1. Review your MOH regularly: You should review your manufacturing overhead cost regularly. This will allow you to identify any areas where you can save money.
2. Reduce the size of your production facility: One way to reduce your MOH is to reduce the size of your production facility. This will lower your rent and utility costs.
3. Relocate your production facility: Another way to reduce your MOH is to relocate your production facility to a cheaper area. This will lower your labor costs and rent expenses.
4. Use lean manufacturing techniques: Lean manufacturing techniques can help you eliminate waste in your manufacturing process. This will help you save money on materials and labor costs.
- 5S- The 5S method is a system for organizing the workplace. It involves sorting, setting in order, shining, standardizing, and sustaining.
- Kaizen- Kaizen is a Japanese word that means "improvement." Kaizen is a continuous improvement process that includes all employees in an organization.
- Poka-Yoke- Poka-yoke is a Japanese quality control term that means "mistake-proofing." Poka-yoke is used to prevent errors in manufacturing.
- Single Minute Exchange of Dies (SMED): SMED is a system for reducing the time it takes to changeover from one product to another. SMED can be used in any manufacturing process.
- Total Productive Maintenance (TPM): TPM is a system for maintaining and improving the performance of equipment. TPM includes preventive maintenance, operator maintenance, and quality maintenance.
5. Outsource your manufacturing: Outsourcing your manufacturing can help you save money on labor and materials costs.
6. Invest in energy-efficient equipment: Investing in energy-efficient equipment can help you save money on your utility costs.
7. Review your insurance policy: You should review your insurance policy regularly. This will allow you to identify any areas where you can save money.
8. Negotiate with suppliers: It would help if you negotiated with your suppliers regularly. This will allow you to get the best prices for your materials.
9. Use technology: Technology can help you automate your manufacturing process. This will help you save money on labor costs.
10. Hire an experienced MOH consultant: Hiring an experienced MOH consultant can help you reduce your MOH costs. The experienced MOH consultant will be able to identify areas where you can save money.
Importance Of Accurate Tracking And Reporting Of Manufacturing Overhead Cost
It is essential to track and report your manufacturing overhead cost accurately. This will allow you to make informed decisions about your business. If you do not follow and report your MOH accurately, you may make decisions that could lead to financial problems for your business.
Manufacturing overhead cost is just another part of doing business. But by tracking it closely and taking steps to reduce it, you can keep your bottom line looking good. So what are you waiting for? Start calculating those costs and see how much money you can save!
Recommended: What Is A Manufacturing Warehouse?