Product Costing

Caterpillar determines its product costs using an activity-based costing system. This costing system:

Traces material costs directly to sub-assemblies and products.
Allocates production labor and production overhead generally on the basis of three activities: logistics, manufacturing and general overhead.

The Caterpillar product costing system separates product costs into variable and period categories. The system excludes from product costing costs of research and engineering new products and major product redesigns; interest costs; and abnormal costs such as machine start-ups and facilities rearrangement costs.

Logistics Activities

Logistics activities include labor and overhead associated with buying, shipping, receiving, and moving parts to and from their point of use. Variable logistics costs include freight, materials handling labor, and fuel on material handling equipment. Period logistics costs include purchasing personnel; depreciation and maintenance on material handling equipment; depreciation, utilities, insurance, taxes and maintenance on receiving and storage space; and labor in receiving and receiving inspection. Logistics activity allocation bases, depending upon the specific product, include piece part weight and/or number of moves.

Manufacturing Activities

Manufacturing activities include all costs associated with manufacturing and assembling the product. Variable manufacturing costs include machine operator labor, assemblers, power and gas for machinery, rework and spoilage, inspection and first line supervision. Period manufacturing activities include depreciation and maintenance on machine tools, durable tools, test stands, assembly stations and work benches; and depreciation, utilities, insurance, taxes and maintenance on space occupied by machinery. Manufacturing activity allocation bases, depending upon the specific product, include labor hours and/or machine hours.

General Overhead Activities

General overhead activities are costs not directly associated with logistics or manufacturing that apply to the whole plant. General overhead activity costs are period only and include accounting, employee and labor relations, plant administration, engineering maintenance, medical services, scheduling and inventory control, and information services. General overhead activity allocation base usually is a percentage of the total of all other costs.