The duties of company operations and production managers should be chosen more often based on where costs hit, so that they can be rewarded or punished based on keeping these expenses low. Burden costs (those costs in manufacturing that are not for workers, but for overhead such as facilities rent or utilities) are very difficult to attribute to one manager, and thus when looking at overhead, it is difficult for a company to task people with lowering costs.

In cost accounting, costs of materials that go into production are relatively easy to calculate. Although it can be difficult to segregate material usage into rework (when more materials are used than should be due to production errors), scrap/shrinkage materials that are stolen or defective, and actual raw/component parts put into WIP (Work in Process) or finished goods, a wall-to-wall physical warehouse inventory guarantees somewhat clean numbers. Accordingly, purchasing/sourcing/supply chain and warehouse can be held responsible for materials costs and shrinkage.

Direct Labor (wages and benefits) for production employees and Indirect Labor costs for employees that manage production are actual numbers that payroll can provide to compare against applied labor estimates based on production quantities. Human Resources staff and production managers can be held responsible for labor costs, based upon hourly labor rates or labor efficiency (whether or not production employees are making as many parts as should be expected based on the time they worked).

Overhead, on the other hand, is not as simple.

In many companies, burden is separated into material and manufacturing buckets. Some areas add costs to material burden such as logistics, warehousing and planning. These are the costs to get materials to and from the production floor in a timely, efficient manner. Other areas add costs to manufacturing burden such as manufacturing engineering, QA etc. These are the costs incurred using those materials to make salable products.

Sometimes, however, different people manage these functions. As opposed to labor and materials, it is difficult to reward and challenge managers when they manage only part of the material or manufacturing burden pool, or when they manage other areas in addition to the pool. This skews other costs under their “control” and does not allow a company to determine if the manager is doing well at his or her job.

If companies had a better idea of cost management techniques and theories, they likely would do a better job of organizing departments to roll up more clearly into only one burden pool. Thus, it is important to segregate duties within a company to better align with overhead buckets. It is the job of cost managers to explain this to upper management. Then, a company can make sure they have the right management staff in place to satisfy shareholders.


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