This statement, “if manufacturing overhead is underapplied then,” is a statement that is often used by the General Electric Company when they are evaluating the cost and effectiveness of manufacturing. It is a common statement. Although this statement is not technically true, it is what many people would like to believe.
This statement is not true because manufacturing overhead is not underapplied. This is because manufacturing overhead is being used to the extreme. Manufacturing overhead applies to the manufacturing of the materials that we use in the manufacturing process. For example, if our product is made of aluminum, and our manufacturing overhead is underapplied, then our manufacturing overhead is underapplied. Why? Because of the materials we use to make our products.
While the manufacturing overhead is underapplied, we don’t actually save on material costs and thus we don’t end up using less of the materials we use in manufacturing our products. So, if we are building an airplane and we use 100% aluminum, then we would be underapplying manufacturing overhead.
It is interesting to note that one of the problems with overhead in the manufacturing sense is that some materials are actually more expensive to manufacture than others. For example, titanium and aluminum are two materials that are relatively inexpensive to manufacture, but are also relatively expensive to source. In other words, you can easily make a car out of a single titanium car door, but you can also make a car out of a single aluminum car door.
The overapplied problem occurs when overhead is applied only to a few materials, and the materials that are underapplied are relatively cheaper than those that are overapplied. However, the problem can be fixed by applying more overhead to a few cheap materials and fewer expensive materials.
I think it’s a fallacy that there aren’t two distinct problems. The problem is that you can easily make a car out of a single titanium car door, but you can also make a car out of a single aluminum car door. The over-applied problem occurs when you can make a car out of a single titanium car door, but you can’t make a car out of a single aluminum car door.
The over-applied problem is a much bigger deal in the auto industry than it is in automotive manufacturing because it involves a lot of overhead that can be extremely expensive. The over-applied problem is especially a problem if the factory is producing a certain product where the overhead is so low that the product is effectively underapplied.
In our case, we don’t have a single titanium car door, but we do have a single aluminum door. We can make a titanium door out of our aluminum door, but we can’t make a car out of an aluminum door.
That is right. The cost of making the titanium door is much lower because the manufacturing overhead is so low. The problem is that titanium is much more expensive than aluminum, so to save the cost of an expensive door, the factory can just make the aluminum door in the next factory. That means the over-applied issue arises when the factory is producing the car door, but the factory is not making an aluminum door.
The problem with this strategy is that the factory producing the door is underapplying, which means they are underusing. They are underapplying because they are trying to make a cheaper door, which is the wrong approach. If they were to make an aluminum door and apply the same amount of overhead, they would have more titanium than they need.