Manufacturing OverheadDefined with Examples

Written By:
Lisa Borga

Manufacturing overhead consists of the indirect costs that a business incurs when manufacturing a product.

Once this overhead is determined, it is assigned to each unit produced.

There are a number of costs that can make up manufacturing overhead, such as:

• Depreciation on machines or equipment that is part of the manufacturing process
• Rent paid for the factory
• Salaries of the managers in the manufacturing department
• Wages for the personnel maintaining the factory
• Utility costs for the factory building
• Salaries for materials management personnel
• Wages for janitors

Generally, direct labor and direct materials are the sole costs that are directly assigned to the units of production.

Therefore, any indirect costs associated with manufacturing are manufacturing overhead.

Costs associated with the administrative and selling operations of a company are not manufacturing overhead.

These costs would include legal fees, corporate salaries, bad debts, and audit fees, among others.

According to the International Financial Reporting Standards and the Generally Accepted Accounting Principles, companies must apply manufacturing overhead to the costs of their manufactured products when completing their financial statements.

This is necessary when a company reports its costs in its inventory asset account or its costs of goods sold.

Businesses use different methods of allocating costs.

Although, allocating costs based on the labor used to manufacture a product or the square footage taken up by the manufacturing equipment is common.

Businesses can also use more than one allocation method.

But, whatever method or methods a business chooses to use, they should be consistent over time.