Product Lines
Product lines group items for reporting, planning, and accounting purposes:
• Reports can be selected and sorted by product line
• Product Line Planning and MRP/DRP can plan by product line
• You can track sales, costs, inventory values and variances in the general ledger by product line
Every item belongs to only one product line. The item’s product line determines whether it is included on a report, or in calculations, and which GL accounts to post to. (Some GL accounts can be taken from the product line or further specified by site, location, or customer type.)
Different departments can have different criteria for grouping items; marketing might want product lines to reflect target markets, manufacturing to reflect production method. Or you might want to establish different product lines for not easily grouped items like raw materials or common components to separate them from finished goods.
See
Account Structures, for more details on product lines.
Direct and Indirect Costs
The terms “direct” and “indirect” relate to the traceability of costs. Conceptually, any cost that can be traced to a single product is a direct cost of that product. This includes the cost of all material and labor that goes into making the product, as well as the cost of any subcontract operations. All production costs other than direct costs are considered indirect, or an overhead.
Fixed and Variable Costs
The terms “fixed” and “variable” relate to the behavior of costs as production volume fluctuates. Variable costs increase directly with increase in volume. Fixed costs, such as rent and utilities costs, do not change, at least in the short term. For example, you still have to pay to heat and light your factory, regardless of the volume of production.
Absorbed vs. Applied Amount
As production is reported, burden costs are absorbed; that is, the standard per unit costs are credited to the burden absorption account based on actual shop floor activity.
When finished items are received, the standard per unit overhead cost is credited to the Applied Overhead account.
When predetermined burden and overhead rates are used, the actual amount absorbed to production in a given month is likely to differ from the total amount of overhead cost actually incurred. This is because production volumes vary from the volume estimates used to determine these rates.
Burden vs. Overhead
Burden is the variable portion of overhead cost. In a standard cost system, standard burden per unit is usually calculated based on predetermined burden rates, typically based on labor or machine hours and/or labor cost.
Overhead is the fixed portion of overhead cost. In a standard cost system, a portion of fixed overhead cost per unit is usually allocated to each item, either manually or as a percentage of some other cost category. For example, fixed overhead can be set to a percentage of material cost.
Characteristics of fixed overhead:
• Fixed amount within a relevant product output range
• Manually calculated by dividing the annual expected overhead costs by the annual expected number of units to be produced. Because total overhead is fixed, as output increases, the cost per unit must decrease.
• Management-level decision on incurrence starts at executive level vs. operating supervisors
Example: Depreciation, rent, insurance, real property taxes, patent amortization, wages for production executives, watchmen, firemen, janitors, maintenance and repairs, insurance, rent
Characteristics of variable overhead:
• Variable amount in direct proportion to output
• Calculated by QAD Enterprise Applications by multiplying the actual number of units produced by a pre-determined burden rate. Because total burden is variable, as output increases, cost per unit is constant.
• Easily assignable to operating departments
• Incurrence decision rests at department level
Example: Supplies, fuel, power, small tools, spoilage/salvage/reclamation expense, receiving costs, royalties, factory travel costs
A summary of key differences between Burden and Overhead is shown in the figure above.
Study Questions
What are some examples of an indirect fixed cost?
Is the maintenance cost of a machine that must be serviced every 5,000 parts, burden or overhead? Fixed or variable?
