When you have a business that produces goods, you should manage the production costs really well. Any manufacturing process will bring a series of costs with it, and they are of different types. You might think they might vary depending on the product and other factors, but there are some fixed costs as well. For a better cost management, you should learn how to calculate fixed manufacturing overhead costs, which are the ones that remain constant.
What are fixed manufacturing overhead costs?
Manufacturing overhead costs
Manufacturing overhead costs represent some costs supported by the factory when making the products. They do not include all the production costs, as those related to labor and materials belong to a different category. Therefore, the costs necessary to pay the workers and the basic materials needed for the products are not part of manufacturing overhead.
Therefore, manufacturing overhead costs include all the other costs that influence production. These include utilities, possible rent for the factory, supervisor salaries, bonuses for the employees in case of a good production, as well as taxes on the property or supplies both for the factory and for the nearby offices.
Fixed manufacturing overhead costs
Some of the manufacturing overhead may vary depending on the production. However, there are still some costs that remain constant. They are fixed, and stay the same even if production increases or decreases. These usually include rent and property taxes, as they don’t change at the same time the production volume changes, as well as costs for the equipment, or the salaries of the supervisors.
What a business owner should do is learn how to calculate fixed manufacturing overhead costs. Judging from one business to another, these costs might be different. The first step is to decide which ones remain constant. Then, they should calculate both the fixed and the variable overhead costs. This is important when deciding on a price for the products, so that the owners can attain profit.
What are the differences between variable and fixed manufacturing overhead costs?
Some of the costs are dependent on the volume of productions, while others are not. Of course, the dependent ones are the variable manufacturing overhead, while the other ones are the fixed ones.
A bigger production will influence the utility costs, as it will consume more energy, gas, and water. Therefore, these fit the variable category. Also, all the mechanical supplies belong to the same category, as well as bonuses or payments that are dependent on the volume of production.
The fixed manufacturing overhead costs will involve the same sum of money even if the factory has an impressive production or if it barely struggles to survive. Apart from rent or taxes, some business owners might include some other expenses into the fixed category.
Machine maintenance usually costs the same regardless of production, so it might be considered a fixed expense. If there aren’t many changes in the production volume, a business owner will pay the same price every year to assure the well-functioning of the machines. Also, the fixing or deterioration costs are constant.
Any possible supervisor salaries are, again, constant. However, in some situations, this might change. There might be moments when a factory has to increase its production greatly, and the current supervisors might not be enough. In this case, these expenses might convert to the variable category. This usually happens with those companies that manufacture holiday products in that specific time of the year.
How to calculate fixed manufacturing overhead costs
Before stating the calculations, you should first choose the period of time you will look at. Usually, business owners do these calculations for a period of one year. To avoid unpleasant situations, it’s better to make some estimates.
Before the start of a year, draw a list of all your fixed manufacturing overhead costs. Then, estimate what these expenses might be at the end of the year. At this point, you should also have a plan on how many products you wish to manufacture during the particular year. Then, make an assumption of how many hours of work it would take you to do it.
To obtain a possible rate of your fixed costs, you have to perform a simple operation. Divide the estimated costs to the estimated hours of work, and you will get a possible cost for one hour of work. However, the assumptions are not always true. Your budget might vary until the end of the year and, if you have to pay more than you’ve assumed, it means you should check your strategy and change it.
Reporting the fixed manufacturing overhead costs
At the end of each year, you have to report these fixed costs, and the way you do it might benefit your company. If you report the cost of each individual unit, then the company will appear more profitable in the end in case of a higher production volume. You can see if your company is really profitable if you can sell the extra inventory as well.
The importance of learning how to calculate fixed manufacturing overhead costs
When estimating the costs, typical accounting practices include both the fixed and the variable overhead. Sometimes, they might opt for alternative methods, but they usually include only the variable half.
Since the variable costs fluctuate, it’s more difficult to keep them under control. Therefore, more business owners are interested in calculating and estimating them first. However, the fixed costs are important as well. They keep the business going and do not get higher if you start prospering. Calculating these expenses first will then allow you to concentrate all your attention on the variable ones.
Learning how to calculate fixed manufacturing overhead costs is essential for the well-functioning of your business. Since these expenses stay constant throughout the entire year, it’s easier to manage your production if you can control them. Instead of facing unexpected situation which might bring you at a loss, you already know what to expect at the end of the year. In case some variations occur, you will know what changes your business needs.