_______________________________________________________________________________________________________ Overheads
In manufacturing , inventory is everything . Yet , manufacturers often struggle to understand how much money it takes , exactly , to make what they make . Any manufacturer estimating their perunit cost is looking at a finite group of factors : materials , labor , shipping and overhead ( or indirect costs ). The first three of these are straightforward . Even as prices on materials fluctuate , for instance , manufacturers know they need to set , and regularly adjust , standard costs . Where I still see manufacturers getting in trouble , though , is with that final factor : overheads / indirect costs .
No one is naive to the fact that making and selling things requires several indirect costs . They know that wages for staff , software , rent , electricity , insurance , and utilities are all required to manufacture a product and must be factored into the per-unit cost . Yet , too often , managers fail to give these overheads the attention they deserve . Faced with a dizzying array of invoices , they will rely on something they read online , an article , maybe , that told them to just add another 30 percent to their direct costs to account for overheads .
Arriving at a generalized overhead rate is necessary , but doing so without taking a close look at your business operations is a mistake . That 30 percent may work for many manufacturers . But for those operating above or below that number , a one-size-fits-all approach can cost dearly . After all , a per-unit miscalculation of just one cent in high-volume manufacturing can result in unrealized profit or substantial loss . It can even impact the valuation for some manufacturers seeking acquisition .
When undervalued inventory hurts
A true understanding of the cost to make a product is essential to running a sustainable operation . An accurate per-unit cost allows manufacturers to manage their margins , identifying inefficiencies in their production process and setting prices properly .
Businesses that undervalue their inventory are sacrificing their competitive edge . Imagine a company bids on a project with a relatively low number because they didn ’ t properly account for indirect costs . They get
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