The indirect manufacturing expenses, or overhead costs, of a manufacturing operation have increased significantly as business has become more complex and as the utilization of more sophisticated machinery and equipment has become more prevalent. As the investment in computer-controlled machinery has increased, improving productivity and reducing direct labor hours, the control of depreciation expense, power costs, machine repairs and maintenance, and similar items has received a greater emphasis by management.
Manufacturing overhead has several distinguishing characteristics compared with the direct manufacturing costs of material and labor. It includes a wide variety of expenses, such as depreciation, property taxes, insurance, fringe benefit costs, indirect labor, supplies, power and other utilities, clerical costs, maintenance and repairs, and other costs that cannot be associated directly with a process or job. These types of costs behave differently from direct costs, as the volume of production varies. Some will fluctuate proportionately as production increases or decreases, and some will remain constant or fixed and will not be sensitive to the change in the number of units produced. Some costs may be semivariable and fixed for a particular volume level; however, they may vary with volume, but not absolutely proportionately with volume, and probably can be segregated into their fixed and variable components.
In the midst of this plethora of fixed, variable, ...