How to Allocate Costs in the Manufacturing Process

by Sam Grover - Updated September 26, 2017

When running a manufacturing business, it is important to establish precisely how much is spent on each part of the process. This is called allocating costs or cost accounting. Rather than simply having one large figure for the entire process, allocated costs look at the cost per hour of each part of the process. When costs are allocated appropriately, it's easy to immediately assess where money is being spent, which makes it substantially easier to make changes when needed.

Divide the manufacturing plant into its key departments. As an example, a furniture factory may have a machining department where the furniture is put together and a finishing department where it is sanded.

Find the individual cost of each of these departments. Assume that the machining process costs $100,000 a year and the finishing costs $50,000 a year. These costs are total costs of labor, machine maintenance, depreciation and any other cost directly connected to these aspects of manufacture.

Find the cost of support departments, such as administration. Assume the administration department costs $50,000 a year.

Divide the support costs proportionally. If the administration department spends roughly 80 percent of its time ordering equipment for the machining department and 20 percent of its time carrying out tasks for the finishing department, then add $40,000 to the machining department's costs and $10,000 to the finishing department's costs. The totals, then, will be $140,000 a year and $60,000 a year.

Find the total amount of time each department runs per year. This is a figure given in machine hours. If all machines operate eight hours a day, to calculate this number, multiply eight hours times five days a week, then multiply that by 52 weeks. This equates to 2,080 hours per year. If two machines operate full-time in the machining department and one machine operates full-time in the finishing department, then machine hours equate to 4,160 and 2,080 respectively.

Divide costs by machine hours. Machining costs are $33.65 an hour and finishing costs are $28.85 an hour.

About the Author

Sam Grover began writing in 2005, also having worked as a behavior therapist and teacher. His work has appeared in New Zealand publications "Critic" and "Logic," where he covered political and educational issues. Grover graduated from the University of Otago with a Bachelor of Arts in history.

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