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Drivers of Manufacturing Overhead Costs

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  • 0:00 What Are Overhead…
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Cost drivers are those factors that cause costs to change. In this lesson, we look at various cost drivers for manufacturing overhead, both for firms that manufacture products and those that create services.

What Are Overhead Manufacturing Costs?

As you probably know, there are a number of costs that go into manufacturing anything. Obviously, there are labor costs associated with paying someone to build a product, and there are materials costs associated with paying for the inputs to get the final product out. However, there are also overhead costs associated with manufacturing. These are those costs that do not directly go towards materials or labor. As you might expect, these can add up quickly, ranging from costs for electricity, to costs for making sure that the means of producing the goods in question are still working well. Figuring out the reason behind these overhead costs is a critical part of making sure that expenses are kept in check. Sometimes, these costs change. A cost driver is the result of that change in cost. There are a number of manufacturing overhead cost drivers that can change the total overhead cost of manufacturing. In this lesson, we're going to look at how these are determined, the importance of finding the correct driver, and looking at how different businesses have different drivers.

How Are Cost Drivers Determined?

In order to determine what an overhead manufacturing cost driver is, we have to first identify what our overhead manufacturing costs are. For a factory, that doesn't just include any utility bills, but also any work that has to be done to the equipment. Maintenance on the machines is a major overhead cost driver if significant repairs need to be made. Remember, to find the cost driver, we look at places where spending has increased considerably and try to figure out why.

Importance of the Correct Driver

We can safely say that labor and materials are their own drivers, so why do we care so much about overhead? Simply put, overhead is so volatile. There is a great deal that can result in an increased overhead cost. Most obviously, electricity is an overhead driver. As a result, if we see a massive change in overhead costs during the summer, we may be able to track it back to electric price fluctuations due to having to cool the building. Because we know what the cause of the fluctuation was, we can plan for it. However, what if such a price rise happened in the middle of October? And instead of electricity, it was a natural gas hike? That could mean that there is inefficiency in the system. Worse, if it is something like natural gas, it could be a cause for a safety concern.

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