A Debit Balance in the Manufacturing Overhead Account at the End of a Year Means What?
- A manufacturing overhead budget set at the beginning of a fiscal year may change during the year, especially if the company decides to replace energy-efficient equipment or switch utility providers. A debit balance on a manufacturing overhead account could indicate that the company is saving money on production, if all goals and production objectives are met as outlined in the manufacturing budget.
- Another meaning of a debit balance on a manufacturing overhead account is that a company did not produce enough products to meet the budget’s ceiling. For example, a company may put $50,000 aside on the manufacturing account for production, but the account may have a debit balance of $10,000 at the end of the year. The debit value could indicate that the company did not produce the amount of product expected by the budget developers, as utility costs are lower compared to a full production month, for example. This means the output did not meet the budget and management expectation.
- If a company has a debit value on the manufacturing overhead account, managers must examine the market demands and trends to determine whether the products offered by the business are still meeting market expectations and selling as expected. The production slows down if the inventory is full, meaning funding is left over in the manufacturing overhead account. The plant may not be in use if the inventory is full, meaning electricity, light and water bills may be lower, adding a debit figure to the account. If there is no demand in the market, the company may not sell as many products as expected when the manufacturing budget was created.
- Managers responsible for creating the manufacturing budget and controlling the production overhead must be prepared for decreases in sales, which do influence the amount available in the overhead account. In addition, the quality aspect of production may be sacrificed if a company produces the same amount of products for lower production costs, if no changes are made in raw materials or equipment. Producing more products than expected with the same overhead costs of rent, utilities and equipment leaves a debit balance on the account, which may result in lower quality products.