Assessment of overhead costs Essay
Assessment of overhead costs
If a decision was made to outsource the manifold manufacturing, then the overheads of the Bridgestone Industries will show significant difference and even reductions in the level of overhead costs. The overhead pertaining to the wages and benefits for the non skilled personnel would decrease as the outsourcing of the product line would reduce the need for the non skilled personnel in the capacities of trucks and janitors by a small percentage level.
The overhead associated with the salaried personnel, including the benefits would also decrease as there would be no need to hire or pay personnel to work on the manifold line. The production supplies overhead which includes production gadgets, tools and equipment like gloves, safety goggles and packing material etc would also reduce as the manifold line would not require such production supplies if outsourced. The overheads associated with the small technical tools would also reduce as the need for such tools would no longer be presented by the manifold line, if the line is to be outsourced to a third party.
The usage of the utilities like coal, gas and electricity used to drive the manufacturing process of manifold would also be eliminated as an expense. Therefore the overhead associated with this expense would also be significantly reduced. On the other hand the wages of the no production employees and the benefits provided to them might not decrease. Any decrease in this overhead would be minimal as the non production employees are not greatly impacted by the outsourcing of a production line as opposed to the production associated employees and personnel.
Similarly the deprecation conducted on the property and the taxes would not reduce and can remain stable as the property is shared by all product lines and as long as the other two product lines are operating, the depreciation overhead would still occur at the same rate. The expenses related to constant personnel for the training, travel, and union representation would also considerably reduce as the number of personnel employed will decrease with the outsourcing of the manifold product line.
The project expense of the setup and arrangement of new equipment and machinery would not be a reducing overhead as this expense is effect by purchase of new equipment and not by the operation of a product line. The overhead associated with the benefits provided to employees in terms of overtime payment, on an hourly basis, state unemployment and the pension provided to employees and labor at the company would not reduce by a significant amount.
Instead this expense can increase as more people are laid off or provided early retirement if the manifold line is outsources. Similarly the benefits of this kind provided to the skilled hourly workers specifically those associated with production will also reduce in the long term due to the outsourcing of the manifold producing. The reduction of this overhead would be due to the reduction in the employee/ labor strength in the production department which would reduce the expenses of benefits for the labor. Estimated Proposed Budget.
In order to effectively budget for the year 1991, considering the manifold line is outsourced to a third party for manufacture, substantial assumptions had to be made. These assumptions pertained included adjusting the estimates of the active production lines at Bridgestone Industries with the incremental growth trend for their respective costs. The costs increase form year to year due to inflation and the changes in the CPI index. As a result it is important to adjust any forecasted figures for the respective growth trend of the costs and revenues.
It has also been assumed that by outsourcing the manifold production line, the company is able to eliminate the costs associated with manifold production line labor, the direct materials used by the manifold production line and the overheads that were contributed to by the manifold production online. Another assumption that is made in the proposed budget is that even though the company has outsourced its operations for the manifold production line. The company is still selling the products by purchasing them from the outsourcing company and providing them to the automobile manufacturers in the United States.
As a result the sales revenue is forecasted even though the costs associated are eliminated and not considered. Moreover the costs associated with outsourcing are not incorporated in the budget as they are no longer part of the manufacturing/ productions department. The following is the proposed budget for the year 1991 which considers the manifold production line to be outsourced while no additional production line is dropped by the Bridgestone Industries. Proposed Budget for the year 1991 USD (‘000) 1991 Sales Fuel Tanks 87,378.
Manifolds 97,031 Doors 52,681 Mufflers/Exhausts – Oil Pans – 237,089 Direct Material Fuel Tanks 17,693 Manifolds – Doors 17,414 Mufflers/Exhausts – Oil Pans – 35,107 Direct Labor Fuel Tanks 4,788 Manifolds – Doors 3,084 Mufflers/Exhausts – Oil Pans – 7,872 Overheads 1000 3,093 1500 3,229 2000 1,152 3000 768 4000 4,049.
5000 11,043 8000 2,039 9000 3,261 11000 1,650 12000 8,543 14000 4,418 43,246 The proposed budget that has been drawn up significantly depicts that if the company opts to outsource the manifolds production line in the year 1991, then the company is able to observe significance reductions in its operating costs and overheads. Therefore it can be mentioned that by outsourcing the manifold production line the company can experience cost savings and better revenue levels.
The proposed budget for the year 1991 indicates that the Sales forecast increased to $237 million while the direct material based costs are forecasted to be at $35 million. The forecast of the direct labor employed for the active production lines would be at $7 million only while the total overheads for the operation would be equivalent to 2 million only. The overhead burden rate in the year 1991 as a result is reduced to 307 percent with the allocated overhead for the fuel tank’s production line at $26 million while the production line for manufacturing the rear and front doors would be at approximately $17 million.