As a freelancer, you can work for manufacturing companies, solve some problems, make calculations for them. 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 the production of mass units 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 the production of a huge volume of units takes place, there are tools that are 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 take an estimate of 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:
- Depreciation equipment used in the production process
- Property taxes on the production facility
- Rent on the factory building
- Salaries of maintenance personnel
- Salaries of manufacturing managers
- Salaries of the materials management staff
- Salaries of the quality control staff
- Supplies not directly associated with products (such as manufacturing forms)
- Utilities for the factory
- Wages of building janitorial staff
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:
So What is Manufacturing Overhead As The Indirect Costs?
Manufacturing overhead includes all of the money and cost that applied to create the finished products or even the raw materials that might range from widgets to tennis rackets to automobiles.
The only difference here is that it does not include the labor and materials, which are merely considered as direct costs and are not subject to be accounted for as manufacturing overhead.
Let’s say over here that if the company needs to make the widget they are going to need the steel or metal and to amend the metal their would be a labor and to pay the labor and the money for metal or steel that comes under the direct cost thus will not be considered as manufacturing costs.
Companies and their accountants need to be able to determine exactly what are these hard-to-define costs, the manufacturing overhead. If you were to omit manufacturing overhead from the true cost of making every given unit or part, you would not have a true value as to what the part or unit actually costs to produce. Take depreciation, for example, which might be one of the key examples of manufacturing overhead in cost accounting as the indirect costs.
Investopedia defines and explains the concept of depreciation as “the allocation of the cost of an asset over a period of time for accounting and tax purposes.”
In other words, the concept of depreciation is the value that an asset decreases year by year due to factors like wear and tear and obsolescence.
It is quite obvious that the manufacturing overhead cost is not guessed by the accountants of the firm but it is actually calculated with the figures and the expenses are counted twice to be ensured. To get around this, cost accountants have a method for determining manufacturing overhead.
Manufacturing Overhead Formula
In most cost accounting costs and systems where, accountants of the firms apply the manufacturing overhead to the goods produced, using an overhead rate that is standard.
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. 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 it is 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 to estimate and reduce the extra expenses where applicable.
And yes, the cost of making accounting and calculation comes under the manufacturing head as the indirect costs since it does not be traced in the direct link to the product manufacturing to the finished products.
What Is Overhead And How To Calculate This?
Overhead is that money or amount of money that is being used by the company for the production and manufacturing of their goods and is considered to be direct materials or direct labor.
This further includes indirect materials and indirect labor. Common overhead costs take the example of utilities, rent of the factory or the place where the production is taking place, insurance, and management costs.
Because of the difficulty in assigning overhead to individual products, managerial accountants in the firm prefer to use different cost allocation methods to calculate the cost of products.
One of the examples over here is that the job order costing estimates each product’s share of overhead by computing an overhead rate. This kind of rate is being calculated by dividing the estimated overhead for the year by some kind of allocation bases, such as direct labor in money (currency) or machine hours. This rate is then used to apply overhead to products, and differences between actual amounts and estimates are regained or combined again at the end of the duration of the accounting.
What are the categories of Labor?
Labor cost is the amount of money that a company bears in paying employees to manufacture their products. Labour can also be broken down into two categories one is indirect and the other is direct labor. Now Direct labor, also known as touch labor, and is the cost that can be easily traced to individual units of a product. For example, assembly line workers are considered direct labor. Indirect labor is that kind of labor that cannot be easily traced to products or the manufacturing of them. Janitors, factory security staff, and factory management are referred to as indirect labor, which is considered part of overhead.
What are the Materials and their accountability?
Raw materials are that of the tangible materials that go into the manufacturing of the company’s final product. For example, a furniture manufacturer’s raw materials may include wood, glue, paint, and nails, The Mobile’s manufacturing company includes the raw material of chips, glass, screen, and metals types of equipment. Raw materials can be further divided into two categories one is direct another is indirect materials. The difference between these two categories is the traceability of the money and resources that are being used on them. Which means the direct link to the product manufacturing and to the finished product.