Manufacturing Support Costs
Manufacturing support costs, often referred to as manufacturing overhead or indirect costs, are all costs associated with the manufacturing process that are not directly tied to the production of a specific unit of output. These are costs that cannot be traced to an individual product, but still support the overall manufacturing operation.
Manufacturing support costs typically include:
- Depreciation and Maintenance: This is the depreciation of equipment and machinery used in the manufacturing process, as well as the cost of maintaining and repairing this equipment.
- Utilities: This includes the cost of electricity, gas, water, and other utilities required to run the manufacturing facilities.
- Rent or Property Taxes: If the manufacturing company doesn’t own the building it operates in, rent would be an overhead cost. Similarly, property taxes apply to companies that own their own facilities.
- Indirect Labor: This includes the wages and benefits of personnel who are not directly involved in the production of the goods but who support those who are. This could include the salaries of production supervisors, maintenance staff, and janitors, among others.
- Insurance: This includes any insurance premiums associated with the manufacturing operations, such as workers’ compensation insurance, liability insurance, and property insurance.
- Other Costs: This category includes costs such as supplies, quality control, and any other cost not directly tied to a specific unit but still necessary for production.
Manufacturing support costs are crucial to factor into the overall cost of production, as they contribute to the total cost of manufacturing a product, even if they aren’t tied to a specific unit. Understanding these costs can help businesses price their products accurately, manage resources efficiently, and ultimately maintain profitability.
Example of Manufacturing Support Costs
Let’s continue with our previous example of “Cycles Inc.”, a company that manufactures bicycles.
- Depreciation and Maintenance: The machinery used for welding the bicycle frames and assembling the bicycles depreciates by $2,000 per month. The maintenance cost for these machines is $500 per month.
- Utilities: The factory where the bicycles are assembled incurs a monthly utility bill for electricity and water totaling $3,000.
- Rent: The rent for the factory premises is $5,000 per month.
- Indirect Labor: The salaries of the production supervisors, maintenance staff, cleaning staff, and security personnel total $8,000 per month.
- Insurance: The monthly premium for the insurance that covers the manufacturing operations is $1,000.
- Other Costs: Miscellaneous costs such as supplies for cleaning and maintenance, safety equipment for workers, and expenses for quality control measures amount to $1,500 per month.
Therefore, the total manufacturing support costs for Cycles Inc. per month would be:
Depreciation and Maintenance: $2,500
Indirect Labor: $8,000
Other Costs: $1,500
Total Manufacturing Support Costs: $21,000
This means that Cycles Inc. incurs $21,000 per month in manufacturing support costs, which would need to be allocated to the cost of each bicycle produced through an appropriate cost allocation method. This information is vital in determining the total cost of production and in setting an appropriate selling price for the bicycles.