Manufacturing Costs: Absorption Methods & Cost Allocation

Discover how our cost accounting experts optimized manufacturing costs using absorption methods, improving accuracy and visibility.
What they say
Cristyn Narciso
Cristyn Narciso
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I found this course very informative and easy to understand. I am just getting started in working with supply chains/manufacturing and enjoyed this free course.
Ankit Kumar
Ankit Kumar
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Very basic but yet an effective course. An easy explanation of different processes of a Supply Chain. The mentor has explained everything through pictures and flow charts which made it easy to understand. He has also provided the slides used in the course for later reference. Good for anyone who is new to the Supply Cain. I really wish him to create a more detailed and advanced course.
Laverne Angela Gadiah
Laverne Angela Gadiah
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Thank you for a very clear, easy to follow and concise course. It was informative and definitely on point.
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The Requirements

Our client, a manufacturing company, was facing challenges in determining the accurate cost of its products. As the company grew, it became apparent that the existing costing methods were not sufficient. There was a need for an expert in manufacturing with cost accounting proficiency to provide a solution.

To address the situation, we took a comprehensive approach to understanding the client’s manufacturing process, including the raw materials, labor, and overhead costs involved. Our team of experts conducted a thorough analysis of the current costing methods and identified areas where improvements could be made.

We recommended implementing a new cost accounting system that would provide better visibility into the costs associated with each product. This involved identifying the direct and indirect costs associated with the manufacturing process and allocating them accordingly.

The Method

The absorption method of calculating factory overheads is a widely accepted practice in the manufacturing industry. This method involves allocating indirect costs such as rent, utilities, and maintenance expenses to the products manufactured based on a predetermined rate.

The rate is calculated by dividing the total indirect costs for the period by a selected measure of production activity, such as machine hours, labor hours, or units produced.

In this context, the calculation of the rate of machine hours is a common approach used to absorb overhead costs in production. Machine hours refer to the number of hours that a machine is in operation during the production process.

By using this measure, the costs associated with the use of machines can be allocated to the products manufactured based on their usage of machine hours.

Discover how this training program will help you eliminate manufacturing waste and transform the performance of your organization.

The Outcome

The deliverable involved a detailed analysis of all the input numbers, referred to as the factors of production. These numbers are critical in determining the hourly rate of any given machine. To complete the task, it was required to provide a spreadsheet that contained precise calculations of the hourly rate of the machine in question.

To accomplish this, we conducted an in-depth review of the various factors of production that are used in manufacturing. These factors included the machine’s energy consumption, maintenance costs, labor expenses, and the cost of raw materials.

We also considered the depreciation of the machine, as well as the cost of financing it. After gathering all the necessary data, we organized it into a comprehensive spreadsheet.

Discover how our tailored operations management services can help you improve the operational performance of your organization.

Any Inquiries?

At UPKAIZEN, we understand that every manufacturing business is unique and faces its own set of challenges. That’s why we offer personalized consultations to help optimize your operations and increase your bottom line.

We cordially invite you to schedule an appointment with us. We understand the value of your time and aim to ensure that every moment spent with us is productive and efficient.

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