Reducing Variable Manufacturing Overhead

Learning Outcomes

  • Discuss strategies to limit and reduce variable manufacturing overhead variances

So how can Mary insure that the spending variance is minimized  for her variable manufacturing overhead? There are a few good ways to make this happen. You may notice some similarities here between reducing labor, materials and overhead variances. They all work together to create the best scenario for the business budget!

  1. Make sure to get high quality supplies! Spending more is not always a bad thing. If buying the good stuff reduces the time to produce the product, then it is worth the extra expense.
  2. Train your employees well and continue the training process. Less waste and higher efficiency will keep your variable manufacturing overhead low!
  3. Be a proactive manager. If you start to notice a “creep” in the time it is taking to manufacture your product, take notice! Talk with the employees involved in the process and get their input. The people actually working on the manufacturing process are invaluable resources! They may be able to offer valuable insight into why it may be taking longer or costing more to manufacture your product.

Managing costs is a big job! It takes the whole team, working together to make good decisions. Engage the team in the budgeting process and then keep them involved!

So, as you can see, the calculation of the variances is just step one in the process. Once we have determined our variances, we need to look at each one and see how we can minimize, reduce or eliminate those variances. Keeping the business profitable is the key! As a manager, you may be held responsible for part of this process. Let’s look at some potential problems, and how, as a manager, you may create solutions!

Remember when Mary was having materials issues? What happens when the cost of the materials rose, but the time to make the shoes stayed the same? What are some ways Mary may need to work to solve this variance?

  1. If the cost of materials increases due to market increases, it may be necessary to look at ways to streamline the production process to reduce production time.
  2. It may be possible that we, as a company, need to rethink pricing! If the cost of materials is rising, and we don’t see the pricing going back, raising the price we charge for our shoes might be the only option.
  3. Mary may need to talk with the purchasing department, and see if it is possible to find alternate sources for our raw materials.

So what about additional production time? Remember when Mary needed to hire a new employee? Jake had skills, but the process was still taking longer than budgeted to make each pair of shoes. What steps can she take to get back on budget?

  1. Train, Train, Train. Additional employee training, effective onboarding of new employees and practice are all necessary to get new employees up to speed. Make sure as well to have a good team environment, where existing employees are involved in the training and onboarding process.
  2. Listen to your employees. Are the raw materials of a quality to limit waste? Are the machines kept in good working order? Is there a cog in the wheel of production that isn’t working well? Maybe it is taking to much time to get materials from the warehouse to the production floor. Or perhaps one machine, in the middle of the process is slowing things down. It cannot be stressed enough, how important listening to the people who do the work is!
  3. Have you set unreasonable expectations? Sometimes, the budgeted amount of time isn’t reasonable. If your staff is trying to meet an expectation that isn’t reasonable, it could actually increase your costs by creating waste or even causing injuries!  Make sure the budgeted time aligns with historical data and again, that you have involved your staff in the budgeting process. Time studies (evaluating through tracking) may be needed here to really get a handle on preparing your time budget.

So, again, getting the numbers is the beginning. Evaluating the numbers  to improve costs, production time and profitability is the goal!

Practice Questions