What Is Manufacturing Overhead Cost?
The manufacturing overhead cost — also known as the factory overhead cost or manufacturing support cost — is the cost that business owners incur outside the expenses associated with direct labor or the cost of raw and direct materials. This calculation tracks a specific overhead rate, looking at the finances associated with the general production process. By tracking these expenses, cost accounting provides business owners with a more complete understanding of what they spend to produce products.
For those building their small businesses, Skynova offers easy-to-use accounting software to help track expenses like manufacturing overhead. The straightforward software can help business owners accurately calculate manufacturing costs and apply them to production.
We'll review the different costs included in manufacturing overhead and what businesses should know about calculating their manufacturing overhead costs.
What's Included in the Manufacturing Overhead Cost?
When it comes to goods manufactured for sale, businesses incur both direct and indirect costs. Direct costs would be the raw materials needed and the direct labor required to make the item. Indirect costs consist of all other expenses, such as indirect labor or insurance. These indirect costs comprise the manufacturing overhead cost.
When people think about the costs associated with their manufacturing processes, they may first think about the direct costs they'll have to pay, such as what they'll have to hire and pay people to directly produce the final product. However, business owners should also closely track and study overhead costs to balance the books and find ways to grow their companies. Some common examples of manufacturing overhead costs are:
- The rent or other fees associated with using the building where production takes place
- Any property taxes or insurance the business owes for the building or the machinery inside
- The communication systems and computers needed to effectively manage the production
- The salaries of the maintenance personnel and janitorial staff
- The costs associated with machinery depreciation
- Electricity and other utilities for the space where the products are made
- Any indirect factory supplies
Many costs included in manufacturing overhead are considered fixed. Expenses like office rent and managerial salaries don't change, even if the rate of production increases. However, variable costs also appear in overhead. If the business produces more products, for example, the machines working faster and longer can be a cost driver in a few ways. Machines may require more oil or increased maintenance, to name just two. Absorption costing accounting practices will then attribute the overhead charges to products, regardless of whether they've sold.
What Is Total Manufacturing Overhead?
The total manufacturing overhead is calculated by tallying up all indirect expenses incurred by the business in the production of its products. It requires a thorough and realistic analysis of the various departments of the company and demonstration of how they contribute to the manufacturing of products. To accurately find your total, you'll want to look at all indirect costs that go into your:
- Use of the building
- The wages you have to pay for indirect labor
- The costs associated with the machinery and utilities that don't involve any raw materials
This analysis requires a close examination of what goes into running business manufacturing, pulling from detailed paperwork and expense reports to find the calculation. This will help show the allocation of your expenses to different areas of the business and determine what applies to indirect manufacturing costs, which will help your balance sheet add up correctly.
How to Calculate Total Manufacturing Overhead
Calculating the total manufacturing overhead is pretty straightforward. All it requires is gathering information for all indirect costs and expenses associated with the production of your business's products.
Keep in mind that the manufacturing overhead can be calculated for an entire facility or on a per-unit basis. The per-facility calculation simply involves adding up all the different indirect costs to get a total cost that the business pays for a given accounting period. On the other hand, the per-unit cost takes that total and divides it among the number of units created to get a better understanding of how the overhead can be allocated to individual products. In our example, we'll show how to do it for the overall facility.
Here is your manufacturing overhead formula:
|Total Manufacturing Overhead|
|=||Sum of All Indirect Costs Associated With the Production of Products|
Let's say a company had to pay $10,000 per quarter in rent, $6,000 per quarter in insurance, $1,000 per quarter in machine maintenance, and $12,000 per quarter in salary for a supervisor and a quality control professional.
Their total manufacturing overhead would be $10,000 + $6,000 + $1,000 + $12,000 = $29,000 per quarter.
Types of manufacturing overhead expenses associated with these indirect costs might be:
- The depreciation of the machinery and manufacturing equipment needed to produce the products
- Machine hours or the cost of running a machine for an hour
- The cost of utilities, rent, insurance, and any other expenses required to operate in the building or manufacturing facility
- The wages or salaries associated with managers, quality control operators, janitors, and anyone else associated indirectly with the production of the products
- Any costs associated with maintaining the machinery
- Light bulbs or any other indirect materials needed to manufacture the products
To help you navigate these calculations, Skynova offers accounting software that simplifies this process. As a small business owner, you can simply create new expense listings and classify the indirect costs as your manufacturing overhead. The software will help you keep track of your costs and run financial reports that help you manage your books faster so you can get back to building your business.
What Accounting Standards Need to Be Followed for Manufacturing Overhead?
The Generally Accepted Accounting Principles (GAAP) state that the manufacturing overhead should be included in the cost of materials for the business and the direct labor costs. This helps the business determine the accurate value of the inventory and the cost of goods sold (COGS).
The predetermined overhead rate plays a significant role in the product valuation. Without including this calculation in these areas, businesses will not gain an accurate picture of their finances. Knowing the value of your inventory and the costs associated with the products sold is necessary to ensure that your accounting sheets remain balanced.
Keep in mind that you don't have to calculate the manufacturing overhead for a single unit to keep accurate books. While some companies find that helpful for different aspects of accounting, such as pricing, it's not necessary. Knowing the overall manufacturing overhead is all that's needed to keep the books balanced.
Let Skynova Help You Manage Your Small Business Accounting
When it comes to building your small business, accurate and easy accounting plays an enormous role in your growth. The better you can see and understand the finances of your business, the more you will improve your ability to properly invest and find areas to boost your production.
Understanding the calculation of your overhead manufacturing costs plays a critical role in tracking your financial books accurately. Skynova makes it easy for businesses of all sizes to easily track their expenses so they can accurately determine their manufacturing overhead and how much they spend to produce products. With Skynova's accounting software, it's possible to quickly record expenses and categorize them so you know precisely where your money goes.
It has never been easier to master your small business accounting than with Skynova. See how our software products and business templates can help you take the mystery and confusion out of accounting.
Notice to the Reader
The content within this article is meant to be used as general guidelines regarding accounting calculations and may not apply to your specific situation or financial statements. Always consult with a tax professional for specific and individual tax advice.