Manufacturing companies operate in a highly competitive industry. In order to compete, these companies seek ways to reduce their costs. This allows them to offer lower prices to their customers. Cost-reduction teams abound in different organizations. As employees in these companies work to find opportunities to reduce costs, it helps to identify the highest expenses in the company. For manufacturers, these expenses fall into four main categories.
Materials represent a large expense for all manufacturers. As a company plans to build products to sell to customers, it needs to purchase materials to use in the production process and to support plant activities. Direct materials are items used in the product itself, and could include steel, wood and plastic. Indirect materials are items used to support the production process and other plant activities. Indirect materials include glue, lubricants or copy paper.
Labor also represents a large expense for a manufacturer. Manufacturing companies need employees to operate the equipment and to transport the raw materials and finished products around the plant and the warehouse. Labor expenses include both the employees who work directly in the production process and the employees who support them. Supporting employees include forklift drivers and janitorial staff. Labor expenses also include the plant office employees, such as the plant manager or the plant receptionist.
For most companies, the manufacturing process relies on the use of large equipment to build the products for sale to customers. Some companies purchase new equipment, while other companies lease the equipment. Others choose to build the equipment themselves. If the company builds the equipment or purchases the equipment, it will incur depreciation expense. If the company leases the equipment, it will incur lease expense. In addition, the manufacturing company also experiences repair expenses and ongoing maintenance for the equipment.
Manufacturing companies incur a variety of other expenses, called overhead expenses. Overhead represents one of the largest expenses for the manufacturer. Overhead expenses include all costs that are necessary to operate the manufacturing plant beyond those directly involved with the production process. Examples of overhead expenses include office supplies, property taxes, cleaning expenses and employee benefits.
