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Chilton allocates variable manufacturing overhead costs on the basis of machine hours. Chilton budgeted .5 machine hours per lamp and allocates overhead at a rate of $1.80 per machine hour. Last year Chilton manufactured 23,000 lamps, used 13,800 machine hours and incurred actual overhead costs of $15,180.
Small businesses and new start-ups must keep close watch on their manufacturing costs to make a profit. The term variable manufacturing cost applies to accounting methods to track business expenses and profits. Depending on the type of accounting system used, the specifics of the variable costs vary widely. Manufacturing costs include funds spent on direct costs, such as the amount your business spends for the materials and the amount you pay labor to make the items.