Allocated Overhead

CIOP is an end-to-end supply chain training and certification program designed and developed by supply chain practitioners and consultants. The syllabus was developed in consultation with the industry, which led to Inventory Management Body of Knowledge (IMBoK v3.0). Most of the class discussions you will hear cannot be found in any textbook rather these are all the original contribution from the developers of CIOP. For example, think about the types of inventories such as raw material, work-in-process and finished goods. Out of these three, WIP is the most difficult to sell in the market and that is one of the reasons, WIP should be controlled well. The company has a built-in capability and capacity to sell finished goods, which is their business. The second easy to sell are the raw materials as you know the suppliers, who may either buy-back or at least guide you. But in case of WIP, this is custom manufactured to suit your manufacturing processes and may not well fit any other organisation, hence you may have to sell it as a scrap.

One of the first things a Warehouse Manager has to do is make an accurate assessment of his direct labor costs and make a determination of his overhead rate versus sales and profit. In today's competitive retail environment, determining where to spend funds is a critical first step in making business decisions that can become a new norm for success. 

One of the challenges warehouse managers face is balancing the direct labor cost with the associated profit from the overall performance of the warehouse. If one area is overly expensive, it is important to analyze why this is the case and make the necessary changes to achieve better results in the operating budget.

An often-neglected method that directly affects the bottom line is the allocation of overhead expenses. Allocated overhead costs are defined as the direct expenses associated with the production process and/or storage and shipping of raw materials, finished goods, and inventory. The direct method of costing merchandise inventory requires knowledge of all of the items in inventory and their relationship to one another. Many times there is a large degree of inter-relatedness among items within a production process or warehouse.

Direct labor costs are the result of direct labor performed to create goods and/or services and include the salaries and wages of employees performing work under the control of the company. Overhead expenses include indirect labor costs such as travel, insurance, utilities, and various overhead expenses incurred by the company to perform its operations. A good warehouse management system will be able to track all of these indirect costs of operations and provide a comparative value that can easily be understood and reported.

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