16 February 2017
An engineered cost means expenses associated with a production process.
While many costs are associated with a production process in an organization, engineered costs are those that have a direct association to output. The cost relationships are easy to identify and measure relative to other types of costs. These costs are variable, meaning that they fluctuate proportionally to the level of production. In order to tell if a cost is engineered, it is helpful to think about what the cost is tied to. If the cost is associated with overhead that does not directly vary with the number of units produced, then it is not an engineered cost. If it is the cost of a direct input of the product and produces more units would require purchasing more of that input, then the cost is considered an engineered cost. Let’s look at an example.
Example Raj is trying to categorize a list of costs for the plant at which he is the general manager. In order to determine which costs are directly linked to production outputs, he wants to note which costs are engineered costs. The costs are listed below: 1. Marketing 2. Direct Labor 3. Air conditioning 4. General manager’s salary 5. Direct Materials
Marketing, air conditioning, and Raj’s salary are not considered engineered costs because they do not have a direct cost relationship to outputs. Direct labor and direct materials can be directly linked to output, and are therefore considered engineered costs.
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