Manufacturing Costs for Tesla

Tesla is a company known for its innovation in manufacturing electric vehicles (EVs) and clean energy instruments. Tesla manufactures the key module for their EV, such as battery pack, drive unit, and seating, in-house (Tesla Impact Report 2020, 2020). The company manufactures a large number of automobile parts in-house, which is unusual for automobile manufacturers as many auto companies rely on other manufacturers for most of their vehicle components (Hoge, 2016). This article will examine the manufacturing costs for Tesla which involves a sophisticated process.

For this horde of in-house manufacturing jobs, the Fremont Plant alone is employing more than 10,000 people (Tesla Factory, n.d.). Despite the large number of components manufactured in-house, the company still relies on about 300 suppliers for parts (Hoge, 2016). All of these will incur manufacturing costs for Tesla.

These manufacturing costs can be categorized in various ways. Garrison et al. (2017) suggested that for manufacturing companies, the common classification is to distinguish the manufacturing costs into three categories: direct materials, direct labor, and manufacturing overhead. Another way to categorize costs is based on the behavior of changes in activities. A cost is classified as variable cost if it changes depending on the activity levels, and fixed cost if it doesn’t change regardless of the activity levels.

Direct materials for Tesla are all materials that the costs can be traced conveniently to the finished EV. It includes raw materials such as the aluminum sheet for the EV body, as well as finished components it purchased from suppliers, such as tires and semiconductors. The labor costs that can be tracked easily to the finished EV are categorized as direct labor costs. Kosak (2018) stated that for labor directly involved in EV manufacturing, Tesla’s cost of labor is $2,387 per EV at a production rate of 554,688 cars per year.

These costs of direct materials and direct labor will rise in direct proportion to the activity levels. The more EVs produced, the higher these costs will be. Hence, these costs can also be classified as variable costs.

Indirect materials and indirect labor costs that cannot be easily traced to finished products are included in the manufacturing overhead. For Tesla, the adhesive to install the windshield and cleaning supplies are some examples of indirect materials. The indirect laborers are supervisors, security guards, janitors, etc. In this category, there are also other facility costs that cannot be easily traced to finished products, such as utility costs, depreciation of manufacturing equipment, property taxes, etc.

These overhead costs will not necessarily change regardless of the activity levels. Regardless of how many EV produced, the costs will be the same. Hence, these costs can also be classified as fixed costs.

These are the manufacturing costs Tesla has to record, aside from their non-manufacturing costs. Read more about the selling, general, and administrative costs for Tesla here.

References

Garrison, R., Noreen, E., & Brewer, P. (2017). Managerial Accounting (16th ed.). McGraw-Hill Education.

Hoge, P. (2016, August 4). The Tesla Effect: How the cutting edge company became the most powerful engine in Bay Area manufacturing. San Francisco Business Times. https://www.bizjournals.com/sanfrancisco/news/2016/08/04/how-tesla-drives-manufacturing-bay-are-elon-musk.html

Kosak, E. (2018, July 1). Peeking Behind Tesla’s Labor Curtain. CleanTechnica. https://cleantechnica.com/2018/07/01/peeking-behind-teslas-labor-curtain/

Tesla Factory. (n.d.). Tesla. Retrieved September 10, 2021, from https://www.tesla.com/factory

Tesla Impact Report 2020. (2020). https://www.tesla.com/impact-report/2020

Read More about Managerial Accounting here.