Material handling costs refer to the expenditure incurred by an organization from the movement of materials. Industries generally find it complex to determine material costs, as these are not direct costs. An organization needs to determine the cost of moving materials it is prepared to incur upon. Most of the organizations develop strategies to implement during material handling, aimed at accomplishing the activities in the most cost-effective manner. During the course of determining material handling costs, organizations start with investigation of costs of goods manufactured.
The following instructions should be followed for effective cost analysis of materials:
- Firstly, a manufacturing company should determine the cost of goods manufactured using the cost accounting method and determine the prices of each good individually. This technique is used to add up all expenses associated with manufacturing of goods, and the total costs are then divided by the total amount of products manufactured, to arrive at a cost of each item.
- The next step is to estimate profits. While a manufacturing company determines the material handling costs, they are then compared to the profits generated, which would generally be higher, excluding the materials handling fee. Therefore, companies usually assess how much the profit is off by and accordingly, conclude a percentage to be used for material handling.
- Concluding a percentage rate would mean the total amount of expenses associated with handling the material. As we studied before, material handling costs are quite complex to be differentiated from the total costs owing to their nature, but could be identical to the overhead costs incurred by manufacturing businesses. This percentage rate may differ from one company to another by 2% or more. Nevertheless, it should be able to cover all costs, irrespectively whether they have been particularly allocated in the manufacturing costs.
- The next step is to add the percentage to the cost of the goods and thereafter to the cost of manufacturing the goods. This will enable companies in determining a far precise, accurate selling price and a more pragmatic observation of the profits generated.
- Last but not the least, the evaluation of material handling fees is the crucial next step. Most of the manufacturing companies try reducing the material handling costs, so that they can offer lower prices and thereby, make better profits. This can only be achieved through elimination of redundant movement of materials and enhancement in profit flow processes.
