Does Manufacturing Overhead include fixed costs?

Question

Accounting Question: Our CFO is advising our company that sometimes it makes sense to sell to customers below our standard cost with the assumption that they are still contributing to fixed costs.

Say for instance a customer buys an item for $50. A breakdown of our standard cost for that item $55 shows the following:

Direct Labor Cost: $20/item

Direct Materials Cost: $20/item

Manufacturing OH (Factory burden): $15

Are fixed costs like rent, insurance, etc figured into the manufacturing OH? I was of the opinion that they were not.

Answer 1

Yes, the costs are figured in.

They are otherwise known as "fixed" and "variable" costs.

the fixed costs are ususally a single figure which is divided by total production to come up with a per-unit cost.

The fixed cost exists whether you make 1 unit or 100000 units.

if your fixed costs were covered, you would have only marginal costs, in this case the 40.00, and perhaps it would make sense to sell at 50.00.

Answer 2

yes they are, they are ongoing costs regardless of production volume