With the recent change in the economy the automobile industry has been suffering. The rise in gas prices kept customers away from buying SUV’s and other large cars; however, since our economy is undergoing a “recession” all sales of automobiles have declined. Car production costs have changed recently because of the change in sales and most automobile companies are cutting their production costs as much as possible. Changes in production costs will affect costs from each direct materials, direct labor, and manufacturing overhead.
Direct materials in the automobile industry are all the products which are used in the production process. When most customers are buying a car they do not think about what goes into making each individual car. Direct materials or raw materials used in developing a new car are costly to car manufacturers, which in turn becomes costly for customers. Since the price of raw materials has severely increased other costs need to be decreased so the costs of raw materials are not over-bearing. In other words, the cost of raw materials such as metal, plastics, and fibres are increasing drastically. For example, recently in Tokyo, Japan where the Nissan manufacturer is based, the cost of steel sheets rose thirteen percent. Direct materials in this specific industry are extremely important so you must buy your materials at whatever price necessary. Because direct materials are costly, other parts of your production need to be decreased.
Direct labor includes all of the people or employees that help in producing a car. While sales have decreased in the automobile industry, so has the cost of direct labor. In the 1980’s the hourly unit labor cost as the percentage of new car costs was twenty-six percent. And the most recent hourly unit labor cost per new car is about fifteen percent. Since the demand for automobiles is decreasing manufacturers do not need as many employees working on producing cars. So in turn, since sales have fallen, manufacturers are letting go of employees used in direct labor because it will decrease their expenses. Direct labor is the only production cost in which the car manufacturers can control themselves. By decreasing their labor costs, manufacturers are cutting down part of their production costs.
Manufacturing overhead in producing a car includes all the other costs other than direct materials and direct labor. For example, the importing and exporting of the cars is included in manufacturing overhead. The cost of importing certain cars into the United States is probably one of the many manufacturing overhead costs which have increased. This cost most likely increased because of the increase in gas prices over the last two years. Along with direct materials and direct labor, manufacturing overhead costs need to stay low in order for production costs to stay low.
For car manufacturers to stay in business during the recent change in our economy, they have to keep the production costs low. However, with our current economy production costs are unstable and currently increasing. The demand for automobiles has decreased because customers are looking to save money not spend it. Because sales have decreased the cost of producing automobiles has done the opposite, it has increased. For the next year or so, sales will stay low and production will stay inflated, but hopefully somewhere in the near future our economy will return to the way it was before. Car sales will return to normal and production costs will also. The question is, by the time you need to buy your next car, will the economy have changed?