A manufacturing company faced challenges due to an outdated overhead absorption rate, resulting in inaccurate profit margins. To address this, the company engaged Stout to update its overhead and cost absorption model.

We defined the company’s overhead cost pool in alignment with ASC 330, calculated departmental overhead rates, and designed an absorption model based on direct labor hours. Additionally, we developed templates to track overhead variances monthly and implemented processes to capitalize these variances based on inventory turnover. We also drafted a technical accounting memo to support the changes.

As a result, the manufacturing company successfully utilized our updated absorption model to gain an accurate understanding of product profitability.