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Strategic Financial Services for Management of Manufacturing & Corporate Overheads

Apohan Corporate Consultants Pvt. Ltd. > Financial Strategy > Strategic Financial Services for Management of Manufacturing & Corporate Overheads

Allocation of overheads

Concept of overheads:

Overheads are the costs incurred by a company that cannot be directly attributed to any specific product or service or project or work generating revenue for the company. A company manufacturing the headlights of a car can identify the specific quantity of the the input raw materials such as plastic, glass, electric lamps, shining coating material, etc that goes into a specific variety of head lamp. But it cannot identify in the same exact manner the amount of plant rent paid, the expenses on the company vehicles, the salary of the Managing Director, etc that has gone into one head lamp. All such expenses are called overheads.


 

Types of overheads

There are two types of overheads:
1. Manufacturing overheads: They are the expenses such as the rent of manufacturing facility, electricity paid for manufacturing, vehicles used for transporting raw materials and goods, salary of design staff, etc. All these expenses are incurred for manufacturing only, but still they cannot be attributed to one specific product. For example, it might be very difficult to locate an electricity bill of a manufacturing plant across 5000 metal forgings of 15 types. The companies are organised into various departments by the products. The manufacturing overheads are billed together for the entire organisation. It becomes difficult to identify what was the total manufacturing cost of a specific product if there is no scientific and mutually accepted method of allocating them.
Marketing expenses should be treated as manufacturing overheads people are going to claim relative performance for the different varieties of products.

2. Corporate overheads: These expenses are incurred to run the company and are not so directly related to manufacturing. They are, for example, rent of the corporate office, expenses on corporate office vehicles, salaries of directors, charges paid to the statutory auditors, fees of lawyers of company, functions and ceremonies, travel and lodging expenses for strategic purposes, interest on loan, etc.


 

Importance of overheads

The proportion of overheads in comparison with the main production costs is very important for any organisation. A company should be knowing the following ratio:
Main manufacturing expenses: Manufacturing overheads: Corporate overheads : Total Running costs (100). Importance of overhead management can be understood by knowing what happens in the absence of it:

 

In the absence of computation of overheads:

1. It is not possible to get the clarity of profitability of an individual category of product.
2. It becomes difficult to compare the performance of various product lines
3. It creates dispute between the heads (people) of various product lines in terms of who was more cost effective
4. It makes difficult to compute the total cost of production and only the marginal cost of production is available
5. It makes it difficult to rank the products in the order of their financial contribution assign marketing priorities to them
6. It creates difficulties in deciding the performance incentives for the operational staff
7. The company may become unreasonable in cost cutting in in manufacturing and the conduct of Management may be very lavish.
8. The reason for the poor financial performance of the company may be a top heavy management. It becomes difficult to find the exact impact.
9. The company cannot analyse the the data of performance of various projects
10. The company might be carrying out several loss making projects, works and maybe producing many negatively contributing products without realising that
11. Certain products and projects might be drawing and reasonable amount of overhead expenses, but still the company might be continuing with them
12. A company may fail because its overheads are not in line with the industry standards for that category of product and for that size of company


 

Apohan services:

1. Identification of overheads
2. Suggesting the desirable changes in the accounting system to capture overheads
3. Calculation & classification of overheads
4. Allocation of all overheads two products, projects, departments
5. Computation of the financial contribution & profitability of each item
6. Product basket rationalization to increase the revenues
7. Suggestion of measures for reduction of overheads

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