Allocation of manufacturing overhead in the bottled water industry: SAFA water factory
Project principle investigators: Ayman A. Al-Ghamdi and Mohammed A. Zumah
Supervisor: Dr Muhammad Al-Salamah
Course: ISE-304 Principles of Industrial Costing
Institution: King Fahd University of Petroleum and Minerals
Introduction
SAFA Water Factory is one of the Bin-Zumah Trading & Manufacturing Group. It established in 1976 in Makkah Al-Mukaramah. It produces drinking water in different sizes.
Project Purpose
In this project, we are going to apply one of the course tools – whish is allocation of manufacturing overhead – for a real organization using valid data. The organization we pick is SAFA Water Factory. We requested some data we are going to need, and we’ll allocate their Overhead cost using various methodologies, their existing one and other suggested methodologies for the sake of improvement.
Data & Data Analysis
In the factory, there are four production areas for different production size. For each production size, there are number of production lines. A large unit machine for filling water is assigned for each production line. There is one labor per production line and one supervisor per production area. Labors received their wages upon an hourly system. For March 2002, the Data was as follows:
|
Size |
Production Lines |
Workers |
Labor Cost / Month (SR) |
Labor Hours / Month (Hr) |
Volume / Month (Unit) |
Cost / Unit (SR) |
Machine Cost / Month (SR) |
|
0.33 Liter |
5 |
11 |
16,500.00 |
3915.0 |
3,168,000 |
0.3 |
4,224.00 |
|
Size |
Production Lines |
Workers |
Labor Cost / Month (SR) |
Labor Hours / Month (Hr) |
Volume / Month (Unit) |
Cost / Unit (SR) |
Machine Cost / Month (SR) |
|
0.55 Liter |
7 |
15 |
22,500.00 |
5481.0 |
2,956,800 |
0.62 |
3,696.00 |
|
Size |
Production Lines |
Workers |
Labor Cost / Month (SR) |
Labor Hours / Month (Hr) |
Volume / Month (Unit) |
Cost / Unit (SR) |
Machine Cost / Month (SR) |
|
1.50 Liter |
4 |
9 |
13,500.00 |
3132.0 |
1,267,200 |
1.2 |
2,745.60 |
|
Size |
Production Lines |
Workers |
Labor Cost / Month (SR) |
Labor Hours / Month (Hr) |
Volume / Month (Unit) |
Cost / Unit (SR) |
Machine Cost / Month (SR) |
|
2.00 Liter |
2 |
5 |
7,500.00 |
1566.0 |
380,160 |
1.9 |
2,534.40 |
For raw material, here is the cost per month with respect to each production size. It includes the cost of water, the cost of added chemicals and the cost of plastic bottles:
|
|
Size A 0.33 Liter |
Size B 0.55 Liter |
Size C 1.50 Liter |
Size D 2.00 Liter |
|
Water Cost / Month (SR) |
104,544.00 |
162,624.00 |
190,080.00 |
76,032.00 |
|
Chemicals Cost / Month (SR) |
73,180.80 |
113,836.80 |
133,056.00 |
53,222.40 |
|
Bottle Cost / Month (SR) |
158,400.00 |
206,976.00 |
101,376.00 |
15,206.40 |
The factory's manufacturing overhead for March, 2002 was: 260,170.36 riyals
Analysis
As a first step in allocating the manufacturing overhead cost, we should calculate the overhead rate.
In order to calculate the overhead rate, we use the following formula:
Overhead Rate = Manufacturing Overhead / basis
There many types of basis and for this project we choose the following basis:
- Labor cost basis
- Labor hours basis
- Machine cost basis
- Raw material basis
Now, we will use each basis to allocate the manufacturing overhead cost.
A. Labor cost basis
Overhead Rate = Manufacturing Overhead / labor cost
Labor Cost Basis = 60,000.00 SR
Manufacturing Overhead Cost = 260,170.36 SR
Overhead Rate = 260,170.36 / 60,000.00 = 4.34
Thus, the Overhead rate = 4.43 SR / SR of Labor cost
|
Production Size |
Labor Cost |
Overhead Rate |
Allocated Overhead (SR) |
|
A |
16,500.00 |
4.34 |
71,546.85 |
|
B |
22,500.00 |
97,563.89 |
|
|
C |
13,500.00 |
58,538.33 |
|
|
D |
7,500.00 |
32,521.30 |
Now, we’ll calculate the overhead cost per production unit:
|
Production Size |
Volume / Month |
Allocated Overhead |
Overhead/ unit (SR) |
|
A |
3,168,000.00 |
71,546.85 |
0.022584 |
|
B |
2,956,800.00 |
97,563.89 |
0.032996 |
|
C |
1,267,200.00 |
58,538.33 |
0.046195 |
|
D |
380,160.00 |
32,521.30 |
0.085546 |
B. Labor hours basis
overhead Rate = Manufacturing Overhead / Labor hours
Labor Hours Basis = 14,094.00 Hours
Manufacturing Overhead Cost = 260,170.36 SR
Overhead Rate = 260,170.36 / 14,094.00 = 18.46
Thus, the Overhead rate = 18.46 SR / Labor Hour
|
Production Size |
Labor Hours |
Overhead Rate |
Allocated Overhead (SR) |
|
A |
3,915.00 |
18.46 |
72,269.54 |
|
B |
5,481.00 |
101,177.36 |
|
|
C |
3,132.00 |
57,815.64 |
|
|
D |
1,566.00 |
28,907.82 |
Now, we’ll calculate the overhead cost per production unit:
|
Production Size |
Volume / Month |
Allocated Overhead |
Overhead/ unit (SR) |
|
A |
3,168,000.00 |
72,269.54 |
0.022812 |
|
B |
2,956,800.00 |
101,177.36 |
0.034219 |
|
C |
1,267,200.00 |
57,815.64 |
0.045625 |
|
D |
380,160.00 |
28,907.82 |
0.076041 |
C. Machine hours basis
Overhead Rate = Manufacturing Overhead / machine hours
Machine Cost Basis = 13,200.00 SR
Manufacturing Overhead Cost = 260,170.36 SR
Overhead Rate = 260,170.36 / 13,200.00 = 19.71
Thus, the Overhead rate = 19.71 SR / SR Machine Cost
|
Production Size |
Machine Cost |
Overhead Rate |
Allocated Overhead (SR) |
|
A |
4,224.00 |
19.71 |
83,254.52 |
|
B |
3,696.00 |
72,847.70 |
|
|
C |
2,745.60 |
54,115.43 |
|
|
D |
2,534.40 |
49,952.71 |
Now, we’ll calculate the overhead cost per production unit:
|
Production Size |
Volume / Month |
Allocated Overhead |
Overhead/ unit (SR) |
|
A |
3,168,000.00 |
83,254.52 |
0.02628 |
|
B |
2,956,800.00 |
72,847.70 |
0.024637 |
|
C |
1,267,200.00 |
54,115.43 |
0.042705 |
|
D |
380,160.00 |
49,952.71 |
0.131399 |
D. Raw material cost basis
Overhead Rate = Manufacturing Overhead / direct material cost
Raw Materials Cost Basis = 1,388,534.40 SR
Manufacturing Overhead Cost = 260,170.36 SR
Overhead Rate = 260,170.36 / 1,388,534.40 = 0.1874
Thus, the Overhead rate = 0.1874 SR / SR Raw Material Cost
|
Production Size |
Raw Materials Cost |
Overhead Rate |
Allocated Overhead (SR) |
|
A |
336,124.80 |
0.1874 |
62979.86579 |
|
B |
483,436.80 |
90581.78623 |
|
|
C |
424,512.00 |
79541.01805 |
|
|
D |
144,460.80 |
27067.68973 |
Now, we’ll calculate the overhead cost per production unit:
|
Production Size |
Volume / Month |
Allocated Overhead |
Overhead/ unit (SR) |
|
A |
3,168,000.00 |
62979.86579 |
0.01988 |
|
B |
2,956,800.00 |
90581.78623 |
0.030635 |
|
C |
1,267,200.00 |
79541.01805 |
0.062769 |
|
D |
380,160.00 |
27067.68973 |
0.071201 |
Comparison between bases
The following chart represents every production unit and the load of overhead cost per each unit with respect to each basis we selected.
Conclusion
The basis that affected the most with the rate of the production is: raw material basis. Since number of labors mostly won’t change if the management decided to increase the rate of production by 2% for example. Also labor hours don’t contribute that much to the rate of production, since the filling speed is an adjusted controller.
On the other hand, machine cost is a factor that might be affected by the rate of production. Also, obviously raw material is playing huge rule in manipulating the overhead the most.
We conclude that machine cost and raw materials cost are the promoted basis for such type of organizations, and we recommend using raw material cost is the basis for allocating the manufacturing overhead cost.
توزيع النفقات التحويلية في صناعة المياه المعبأة
باحثي المشروع الأساسيين: أيمن أحمد الغامدي ومحمد بن زومة
المشرف : الدكتور محمد السلامة
المادة: مبادئ حساب التكاليف الصناعية
المؤسسة التعليمية: جامعة الملك فهد للبترول والمعادن