Defining fixed and variable costs that make up your manufacturing overhead costs: What you need to know
Fixed and variable costs make up the manufacturing overhead costs and today we want to showyou the differences that exist between the two by giving you some examples that will help clear up your confusion.
So let's see what are the differences when we talk about variable and fixe manufacturing costs!
What you should know about variable manufacturing costs:
Variable manufacturing costs change when sales increase and these costs increase at a constant rate relative to the amount of the product to be manufactured. (E.g. Thread used to manufacture carpets varies with the number of carpets you manufacture.)
When it comes about fixed manufacturing overhead costs, know this:
Keep in mind that fixed manufacturing overhead costs don't change much every quarter because they're not dependent on the amount of units ordered by the buyer. (E.g. The supervisor at a factory gets a fixed amount each month/quarter for his services and this won't change if product orders increase.)
You need to understand this whenever you use a manufacturing overhead budget. Because if you struggle to control your overhead costs, it could put you out of business.
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Remember this golden rule: It will help you control your overhead costs
The effect of ever-increasing overhead expenses pushes up the price of your product, just like when materials and labour cost rise. And that's what makes an overhead budget so important.
This means that you have to make enough profit selling your products to also keep up with the increasing electricity and other overhead costs.
Jacob needs to budget for all his indirect costs. The manufacturing overhead costs closely related to the manufacturing process are vital. If he doesn't factor them in, he'll lose track of inventory on hand and won't be able to monitor the raw material volumes. But with his manufacturing overhead budget, he reaps the benefit of budgeting for labour costs not directly related to the manufacturing process. This gives him greater control over his costs. His production planning improves and his budgets are much more accurate.
So he's confident that his profit margins are correct and he'll be able to keep the factory running at a profit.