This Is How You Can Lower Your Manufacturing Overhead

Bhagyashri Kambale | December 21, 2021 | 746 views
MANUFACTURING OVERHEAD COST
When it comes to developing a budget for the following financial year of your manufacturing business, many operations managers start with direct labor and material expenditures. But, what about manufacturing overhead costs?

Manufacturing overhead is any expense not directly tied to a factory's production. Therefore, the indirect costs in manufacturing overhead can also be called factory overhead or production overhead.

Outsourcing and globalization of manufacturing allows companies to reduce costs, benefits consumers with lower-cost goods and services, and causes economic expansion that reduces unemployment and increases productivity and job creation.

– Larry Elder

So, this article focuses on some highly effective overhead cost reduction methods that would help you build a healthy budget for the following year.


Manufacturing Overhead Costs: What Is Included?

Everything or everyone within the factory that isn't actively producing items should be considered overhead.
  • The following are some of the variables that are considered overhead costs:
  • Depreciation of equipment and production facilities
  • Taxes, insurance, and utilities
  • Supervisors, maintenance, quality control, and other on-site personnel who aren't producing signs
  • Indirect supply from light bulbs to toilet paper is also included in the overhead cost.


Manufacturing Overhead Costs: What Is Excluded?

Everything or everyone within or outside the factory that is actively producing items should be excluded from the overhead costs.

Factory overhead does not include the following:
  • Product materials
  • Employee costs for those making the goods daily
  • External administrative overhead, such as a satellite office or human resources
  • Costs associated with C-suite employees
  • Expenses associated with sales and marketing - include pay, travel, and advertising


How to Calculate Overhead Costs in Manufacturing

To know the manufacturing overhead requires calculating the manufacturing overhead rate. The formula to calculate the manufacturing overhead rate i.e. MOR is basic yet vital.
To begin, determine your overall manufacturing overhead expenses. Then, add up all the monthly indirect expenditures that keep manufacturing running smoothly.

Then you can calculate the Manufacturing Overhead Rate (MOR). This statistic shows you your monthly overhead costs as a percentage.

To find this value, divide Total Manufacturing Overhead Cost (TMOC) by Total Monthly Sales (TMS) and multiply it by 100. The final formula will be:
  
 
 
Assume your manufacturing overhead expenses are $50,000 and your monthly sales are $300,000. You get.167 when you divide $50,000 by $300,000. Then increase that by 100 to get your monthly overhead rate of 16.7%. 

 
This means your monthly overhead expenditures will be 16.7% of your monthly income. Being able to forecast and develop better solutions to decrease production overhead.


Five Ways to Reduce Manufacturing Overhead Costs

A variety of strategies may be used by manufacturing organizations to reduce their overhead costs. Here is a summary of some of the most important methods for reducing your manufacturing overhead costs.


Value Stream Mapping – A Production Plant Process Layout 

A value stream map depicts the entire manufacturing process of your plant. Everything from raw material purchase through client delivery is detailed here. The value stream map provides you with a complete picture of the profit-making process. This overhead cost-cutting method is listed first for a reason because every effort to reduce manufacturing overhead costs starts with a value stream map.

Lean manufacturing is also one of the techniques of eliminating unnecessary time, staff, and work that is not necessary for profit and has gained undue favor in the manufacturing process. You must first create a value stream map of the whole manufacturing process for this technique to work. Once the lean manufacturing precept is established, the following strategies for decreasing manufacturing overhead expenses can be examined.


Do Not Forget Your Back Office Management

Before focusing on factory floor cost reduction techniques, remember that your back offices, where payment processing and customer contacts occur, may also be simplified and increase profitability. Fortunately, automation can achieve this profitability at a cheap cost.

Manufacturers increasingly use robotic process automation (RPA) to sell directly to customers rather than rely on complex supply networks. This automation eliminates costly human mistakes in data input and payment processing by automatically filling forms with consumer data. Moreover, the time saved from manual data input (and rectifying inevitable human errors) equates to decreased labor expenses and downtime.


Automating Your Manufacturing Plant

For a long time, manufacturers saw factory automation as a game-changer. As a result, several plant owners make radical changes in their operations using cutting-edge technology despite knowing it realistically. Over-investing in technologies unfamiliar to present industrial personnel might be deemed a technology blunder. Investing in new technology that doesn't generate value or is too hard for current staff to use might be a mistake.

It's usually best to start small when implementing new technology in manufacturing. Using collaborative robots in production is one way to get started with automation. They are inexpensive, need little software and hardware, and may help employees with mundane, repeated chores that gobble up bandwidth. It is a low-cost entry point into automation that saves labor expenses and opens the door for further automation investments when opportunities are available.


Reuse Other Factory Equipment and Supplies

Check with other factories to see if they have any unused equipment or supplies that may be "redeployed" to your manufacturing plant. Redeployment would save you time and money by eliminating the need to look for and install new equipment while lowering your overhead costs.

Outsourcing a fully equipped factory, equipment, or even staff can also assist in lowering overhead costs since you will only pay for what you utilize. As such, it is a viable method to incorporate into your production process.


Employ an In-house Maintenance Expert

An in-house repair technician can service your equipment for routine inspections, preventive maintenance, and minor repairs. This hiring decision might save money on unforeseen repair expenses or work fees for an outside repair provider. Having someone on-site who can do emergency repairs may save you money if your equipment breaks after business hours.


Final Words

Manufacturing overhead cost is an essential aspect of every manufacturing company's budget to consider. Smart manufacturing is intended to be productive, efficient, and cost-effective while effectively managing production expenditures. Calculating the manufacturing overhead can provide you with a better understanding of your company's costs and how to minimize them. Depending on the conditions or geographical needs, each manufacturing plant's overhead expenses may vary. As a result, identify your production overhead costs and concentrate on reducing and improving them.  


FAQ


What are manufacturing overheads? 

Manufacturing overhead cost is a sum of all indirect expenses incurred during production. Manufacturing overhead expenses usually include depreciation of equipment, employee salaries, and power utilized to run the equipment.


What is a decent overhead percentage? 

When a business is functioning successfully, an overhead ratio of less than 35 % is considered favorable.


How can I calculate the cost of manufacturing per unit?

The overall manufacturing cost per unit is determined by dividing the total production expenses by the total number of units produced for a particular time.

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