Material Handling

Definition

Material handling refers to the movement, protection, storage, and control of materials and products throughout the manufacturing, distribution, consumption, and disposal processes. It is a critical component in both cost drivers and activity-based costing within an organization.

5 Must Know Facts For Your Next Test

1. Material handling costs can account for a significant portion of a product's total cost, often ranging from 15% to 70% of the total manufacturing cost.
2. Effective material handling can lead to increased efficiency, reduced waste, and improved productivity in an organization.
3. The choice of material handling equipment, such as forklifts, conveyors, or automated storage and retrieval systems, can have a significant impact on a product's cost structure.
4. Material handling activities, such as loading, unloading, and transporting materials, are often identified as cost drivers in activity-based costing models.
5. Accurate tracking and allocation of material handling costs are crucial for making informed decisions about product pricing, process improvements, and cost management.

Review Questions

• Explain how material handling costs can be considered a cost driver in the context of 6.2 Describe and Identify Cost Drivers.
  • Material handling costs are a significant cost driver in many organizations, as the activities involved in moving, storing, and protecting materials and products can account for a substantial portion of the total manufacturing costs. The specific material handling processes, such as loading, unloading, and transporting, are often identified as cost drivers in the cost driver analysis conducted as part of 6.2 Describe and Identify Cost Drivers. Understanding the impact of material handling costs on the overall cost structure is crucial for making informed decisions about process improvements, resource allocation, and product pricing.
• Describe how material handling costs can be incorporated into an activity-based costing (ABC) model, as discussed in 6.3 Calculate Activity-Based Product Costs.
  • In the context of 6.3 Calculate Activity-Based Product Costs, material handling activities can be identified as distinct cost pools within the ABC model. The costs associated with these material handling activities, such as labor, equipment, and overhead, can then be allocated to individual products or services based on the actual consumption of these activities. This allows for a more accurate representation of the true cost of producing a product, as the material handling costs are directly linked to the production processes. By incorporating material handling costs into the ABC model, organizations can make better-informed decisions about product pricing, process improvements, and cost management.
• Analyze how the selection of material handling equipment and processes can impact the cost structure of a product, and how this information can be used to optimize the product's cost in the context of 6.2 Describe and Identify Cost Drivers and 6.3 Calculate Activity-Based Product Costs.
  • The choice of material handling equipment and processes can have a significant impact on a product's cost structure, which is relevant to both 6.2 Describe and Identify Cost Drivers and 6.3 Calculate Activity-Based Product Costs. For example, the decision to use automated storage and retrieval systems instead of manual material handling may reduce labor costs but increase equipment and maintenance costs. These trade-offs must be carefully analyzed to determine the most cost-effective material handling solution. By understanding the cost implications of different material handling approaches, organizations can optimize their cost drivers and incorporate these costs accurately into their activity-based costing models. This information can then be used to make informed decisions about product pricing, process improvements, and overall cost management.

Related terms

Cost Drivers: Cost drivers are the factors that influence the level of costs incurred by an organization. They are used to identify and analyze the underlying causes of costs.

Activity-Based Costing (ABC): Activity-based costing is a costing methodology that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each.

Supply Chain Management: Supply chain management is the management of the flow of goods and services, including the movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption.