How to Calculate Total Manufacturing Overhead

Manufacturing overhead represents all indirect costs incurred during the production process. These are expenses that cannot be directly traced to specific products but are necessary for factory operations. Calculating total manufacturing overhead provides a comprehensive view of production expenses, which is important for accurate product costing and informed business decisions, such as setting appropriate selling prices.

Understanding Manufacturing Overhead Components

Manufacturing overhead encompasses costs that support production without being a direct part of the finished product. These expenses are broadly categorized into indirect materials, indirect labor, and other indirect costs. Properly classifying these costs is important.

Indirect materials are items used in the production process that do not become a significant part of the final product or are difficult to trace directly to individual units. Examples include lubricants for machinery, cleaning supplies for the factory floor, and small tools or fasteners.

Indirect labor refers to the wages and salaries of employees who contribute to the manufacturing process but are not directly involved in physically creating the product. This includes factory supervisors, maintenance personnel, quality control staff, and security guards for the production facility.

Other indirect costs include expenses necessary for the factory’s operation that are not materials or labor. This category covers costs such as factory rent, utilities, depreciation of manufacturing equipment and buildings, property taxes, insurance, and equipment repairs.

Identifying and Classifying Costs

Identifying and classifying costs accurately is an important step before calculating total manufacturing overhead. This process involves reviewing a business’s financial records to distinguish between various types of expenses and isolate those related to manufacturing.

Businesses use their general ledger and expense accounts to gather this data. Invoices for purchases, payroll records, and utility bills provide the detailed figures needed for each expense category. A chart of accounts helps in systematically locating relevant manufacturing-related expenses.

A primary distinction to make is between direct and indirect costs. Direct costs, such as raw materials and the wages of production line workers, are directly traceable to a specific product and are not part of manufacturing overhead. Indirect costs, however, are those that cannot be easily assigned to a single product but are still necessary for production.

Furthermore, it is important to differentiate manufacturing costs from administrative or selling costs. Expenses like office rent, sales staff salaries, or advertising costs are generally considered period costs, not product costs, and are therefore excluded from manufacturing overhead. Only costs incurred within the factory environment that support production should be classified as manufacturing overhead.

Calculating Total Manufacturing Overhead

Once all relevant manufacturing overhead costs have been identified and classified, the final step involves a straightforward summation. This arithmetic process combines all the indirect expenses gathered from the financial records. The accuracy of this calculation depends entirely on the correct identification and classification of costs in the preceding steps.

To calculate total manufacturing overhead, sum the total amounts for indirect materials, indirect labor, and all other indirect manufacturing costs. This approach ensures that all necessary indirect expenses associated with production are included in the final figure. The formula for this calculation is direct and additive.

The formula is: Total Manufacturing Overhead = Sum of all Indirect Materials + Sum of all Indirect Labor + Sum of all Other Indirect Manufacturing Costs. This simple equation aggregates all the categorized overhead expenses. For example, if a company incurred $5,000 in indirect materials, $15,000 in indirect labor, and $20,000 in other indirect factory costs (like rent and utilities) for a period, the total manufacturing overhead would be $40,000.

This total represents the collective burden of indirect production expenses for the specified period. It provides a comprehensive figure that contributes to understanding the overall cost of goods manufactured. This final sum is then used in various accounting calculations to determine product costs and overall profitability.