USA Overhead Allocation Methods


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May 6, 2016
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I currently took over as plant controller and I am looking into how they previously set their standards. Our costs are about 70% material and 30% DL and OH. There are 5 product lines at this site. The OH was broken down into 5 buckets, one for each product line and then the overhead was allocated to the products within the product group based on material costs. Now since material is the largest component I somewhat understand, however, commodities fluctuate, so when a commodity spikes, the product takes a double whammy as the overhead goes up too, which really doesn't make sense. I've tried to look at the impact of allocating OH based on labor hours, the problem is that most of our OH is fixed, so if we have a project to reduce labor hours then that product would be allocated less overhead, but overhead didn't really change. I'm looking for ideas and methods that others have used. A few other things, there is no machine set up time, we receive in the raw materials, and then the devices we manufacture are build by hand at stations. Small (relatively) volumes with high value; mixed with the manufacturing of service and replacement parts. Any ideas on OH allocation methods are appreciated.
 
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