As a freelancer, you can work for manufacturing companies, solve some problems, make calculations for them. But, either you are an accountant or programmer, you need to understand the term manufacturing overhead. Manufacturing overhead is the term that is used in business-oriented firms, and it means the Indirect Cost.
What Is Manufacturing Overhead?
Manufacturing overhead or factory overhead or factory burden or production overhead represents manufacturing operations costs that include the costs incurred in the manufacturing facilities other than direct materials and direct labor costs such as Indirect costs.
When there is mass production, there are the calculations of each unit and how much each unit bears the expenses in their productions. For any business or factory where there is a huge volume of units, there are tools used to calculate the production cost, or you can say the manufacturing cost per unit. By calculating one unit production cost, it is quite easy to estimate mass production and the resources that are going to be needed. Following are the tools for the calculations that are primarily used:
Manufacturing Overhead can be calculated using:
- Property taxes on the production facility
- Depreciation equipment used in the production process
- Rent on the factory building
- Salaries of maintenance personnel
- Salaries of manufacturing managers
- Salaries of the materials management staff
- Wages of building janitorial staff
- Salaries of the quality control staff
- Supplies not directly associated with products (such as manufacturing forms)
- Utilities for the factory
Although these are those factors that play their role in advancing the manufacturing process. Since these all are equally important for producing the units. And due to these factors, you can calculate the per head cost of each unit. Most importantly, overhead manufacturing costs include the hard-to-define costs associated with making products. But still, they need to be calculated when it comes to marketing. This is called the Indirect cost.
What Are The Manufacturing Overhead Examples?
In the table below is given Manufacturing Overhead Example calculation where or indirect costs are summarized.
Below is Manufacturing Overhead Example calculation:
Manufacturing Overhead Formula
In most cost accounting costs and systems, accountants of the firms apply the manufacturing overhead to the goods produced, using a standard overhead rate.
Manufacturing Overhead Formula can be created when budgeted manufacturing overhead cost is divided by a standard output or activity level. Total budgeted manufacturing overhead varies at different typical output levels. However, total budgeted manufacturing overhead does not differ in direct proportion with output.
Why Manufacturing Overhead Matters the most in Companies?
Manufacturing Overhead Matters the most in Companies because when managers calculate manufacturing overhead, it is easier to reduce unnecessary expenses while growing the company’s net revenue in the process.
Of course, by knowing the manufacturing cost, whether direct or indirect, you can relate the product and its production and the available resources. This can easily help the company or other manufacturing firms estimate and reduce the extra expenses where applicable.
And yes, the cost of making accounting and calculation comes under the manufacturing head as indirect costs since it does not directly link product manufacturing to the finished products.