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C HAP TE R 1 6 Flexible budgets, variances and management control II Teaching tips and points to stress Planning of variable- and fixed-overhead costs It is not unusual for 20–50% of total product costs to be classified as indirect. Surveys show that
10–22% of the total product cost in four segments of the electronics industry is comprised of indirect manufacturing costs. Inclusion of indirect costs from other value-chain elements would further increase the percentage of costs classified as indirect.
Increased automation, complexity of production and distribution processes and product proliferation usually increase the proportion of total costs that are indirect. (However, the lower cost of information processing works against this trend by facilitating more direct-cost tracing) This section explains that the two means of managing variable costs discussed in Chapter 2 also apply to VOH costs
1 Eliminate non-value-added (NVA) costs (e.g. reduce consumption of electricity by using more energy-efficient equipment.
2 Reduce consumption of the cost drivers (e.g. redesign products to require fewer MH). Two
ways to manage FOH costs are 1 Eliminate NVA costs (e.g. adoption of JIT may enable the plant to terminate a warehouse lease.
2 Plan for appropriate capacity levels – too little capacity, we forgo profits on
lost sales too much capacity, we pay for unused resources. If it is possible to identify cause-and-effect relationships, the allocation base ideally should be a cost driver so that product costs will better reflect resource consumption.
The text uses a single VOH cost pool and a single cost allocation base to simplify the analysis. However, multiple
VOH cost pools and cost
allocation bases could be used, as in an ABC system.
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