Manufacturing firms like Boeing convert raw materials into a product and then sells those products to other companies. Manufacturing costs include all costs incurred to make a product. Manufacturing costs are usually divided into three main categories: direct materials, direct labor, and manufacturing overhead. Direct materials at Boeing represent the aircraft engines used on a Boeing 777. Direct labor includes a portion of labor costs often referred to as touch labor, that is the cost of workers who actually touch the product during manufacturing. Manufacturing overhead costs consists of all manufacturing costs other than direct materials and direct labor. Such costs are not as readily traced to products, such as the rivets on a Boeing 777, janitors, and factory facility charges. Cost objects are either direct or indirect costs. Direct costs are those than can be conveniently traced to a particular cost object. Indirect costs are everything else. For example, solder used on each Boeing 777 would be impractical to trace and is generally considered an indirect cost included in overhead. Cost allocation is the process of assigning indirect costs to individual segments or pools to which the costs are common.
At Boeing, Macon, Georgia, both direct and overhead costs are grouped into one cost pool. This makes for cumbersome and inefficient cost management. Management needs to create a number of distinct cost pools in order to better manager expenses. The following categories for breaking expenses into distinct categories are proposed:
Fixed Expenses Equipment Leases, Facility Lease
Manufacturing Expenses Direct Labor, Direct
Variable Expenses Equipment Fuel, Utilities
Manufacturing Expenses Indirect Labor, Mainten-
...