Manufacturing Overhead Essay

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Pages: 4

Manufacturing Overhead

Manufacturing Overhead Manufacturing overhead costs play a vital role in determining final cost of the product. Manufacturing overhead represents all the costs that the company incurs indirectly and not related to the cost of direct labor, direct materials or direct cost of machines (Donald, 2010). In short, companies are not able to trace these costs to individual items during the manufacturing process. Examples of overhead costs include factory supplies, costs emanating from compliance with local, state and federal regulations as well as certain type of equipment and machinery costs (Donald, 2010). Other manufacturing overhead costs include quality assurance
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Another way that Borealis Manufacturing can transform its overhead application system is through creating cost groups for similar activities in the production processes. For example, the company should create a cost pool for the new computerized QC control systems to come up with the cost drivers that will aid the management in harmonizing the production costs to reflect the true accounting standards for the company. In addition, the company should incorporate the operating costs of the QC system as a direct cost of machinery rather than as an overhead cost. The $ 250,000 that Borealis incurred in the purchase of the technology forms part of the direct machinery cost and including it as overhead cost may eventually breed confusion over product costs (Donald, 2010). An activity-based costing system might benefit Borealis Manufacturing in a significant way. Through adopting this system, the company will be able to revise its planning and control procedures to ensure that it does not incur any extra costs during the manufacturing process (Donald, 2010). Through this system, the company will be able to determine with precise accuracy the actual production costs that will aid the management and other stakeholders in the decision making process (Donald, 2010). This cost accounting system will present managers at Borealis Manufacturing