We use the Webb Company example to illustrate the planning and control of variable and fixed overhead costs. Webb manufactures jackets it sells to distributors, who in turn sell them to independent clothing stores and retail chains. Because we assume Webb’s only costs are manufacturing costs, for simplicity we use the term “overhead costs” instead of “manufacturing overhead costs” in this chapter. Webb’s variable overhead costs include energy, machine maintenance, engineering support, and indirect materials. Webb’s fixed overhead costs include plant leasing costs, depreciation on plant equipment, and the salaries of the plant managers.
To effectively plan variable overhead costs, managers focus on activities that create a superior product or service for their customers and eliminate activities that do not add value. For example, customers expect Webb’s jackets to last, so Webb’s managers consider sewing to be an essential activity and plan variable overhead costs to maintain the sewing machines. To reduce costs of maintenance, managers schedule periodic equipment maintenance rather than wait for sewing machines to break down. Many companies use sensors embedded in machines to gather data about machine performance and feed these data into machine learning algorithms to schedule the precise preventive maintenance each machine needs at exactly the right time. Many companies are also seeking ways to reduce energy consumption, both to cut variable overhead costs and to be environmentally friendly. Webb installs smart meters in order to monitor energy use in real time and steer production operations away from peak consumption periods.