1. Materials Management and Inventory Control
Managing the acquisition, storage, and issuance of direct materials is critical to minimizing holding costs while preventing stockouts.
  • Economic Order Quantity (EOQ): A mathematically driven model that calculates the optimal order size that minimizes total inventory costs (ordering costs plus holding costs):

    EOQ = √( (2 × D × O) / H )


    Where: D = Annual Demand Volume, O = Cost per Order, H = Annual Holding Cost per Unit.

  • Just-In-Time (JIT) Inventory: A pull-based operational philosophy popular in European and American lean manufacturing. Materials are ordered and received only as they are needed in the production process, minimizing holding costs to near zero.

2. Labor Costing and Productivity Measurement
Direct labor tracking involves measuring standard hours worked against output generated. Idle time (machine breakdowns, power outages) is isolated and treated as indirect manufacturing overhead rather than being charged directly to the product.
3. Manufacturing Overhead (MOH) and Predetermined Overhead Rates (POHR)
Because indirect costs cannot be traced to specific units, factories use a Predetermined Overhead Rate (POHR) calculated at the beginning of the fiscal period to apply overhead costs to products:

POHR = Estimated Total Manufacturing Overhead Costs ÷ Estimated Total Allocation Base

  • Applied Overhead: During production, overhead is allocated using the actual utilization of the base: Applied MOH = POHR × Actual Allocation Base Used.
  • Underapplied vs. Overapplied Overhead: At year-end, the actual MOH incurred is compared to the applied MOH:
    • Underapplied (Actual > Applied): Unfavorable; remaining balance is typically closed by debiting Cost of Goods Sold (COGS).
    • Overapplied (Actual < Applied): Favorable; remaining balance is credited to COGS.
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