How to Find Total Manufacturing Overhead Cost

Understanding the true cost of producing goods is important for any manufacturing business. Beyond raw materials and direct labor, a significant portion of production costs falls under manufacturing overhead. This category encompasses all indirect expenses that support factory operations but are not directly traceable to a specific product. This article provides a step-by-step guide on how to identify and calculate these indirect costs.

Understanding Manufacturing Overhead

Manufacturing overhead represents all indirect costs incurred during the production process that are not direct materials or direct labor. These expenses are necessary for manufacturing but cannot be easily traced to individual units of production. For instance, the cost of electricity powering factory machinery contributes to production but is not directly tied to a single item.

Direct costs, by contrast, are expenses directly attributed to a specific product, such as the wood for a table or the wages paid to the carpenter assembling it. Indirect costs, like a factory supervisor’s salary or cleaning supplies, support the overall production environment. Understanding manufacturing overhead is important for accurate product costing, pricing decisions, and financial reporting. According to Generally Accepted Accounting Principles (GAAP), manufacturing overhead must be included in the cost of finished goods inventory and work-in-process inventory on a manufacturer’s balance sheet, and in the cost of goods sold on its income statement.

Identifying and Classifying Overhead Costs

This section details the various types of costs that fall under manufacturing overhead, distinct from administrative or selling costs. These expenses are directly related to the manufacturing facility and its production process.

Indirect materials are items used in the factory that are not part of the final product or are impractical to trace directly. Examples include lubricants for machinery, cleaning supplies for the factory floor, or small tools consumed during production. These are often expensed as they are used to support manufacturing operations.

Indirect labor includes the wages and salaries of factory personnel who do not directly work on the product but are essential for production. This category encompasses salaries for factory supervisors, quality control personnel, maintenance staff, and factory janitors.

Other manufacturing costs cover a wide range of expenses. This includes factory rent or mortgage payments, which are fixed costs regardless of production volume. Utilities for the factory, such as electricity, gas, and water, are also included, with costs varying based on usage. Depreciation on factory equipment and buildings is another component. Factory insurance premiums, property taxes on the manufacturing facility, and costs for equipment maintenance and repairs also fall into this category.

Gathering the Relevant Cost Data

Collecting the numerical values for identified manufacturing overhead costs is an important preparatory step. This process requires accessing various financial records for the desired accounting period.

Accounting records, such as the general ledger and expense accounts, are the primary source for this information. Invoices from suppliers for indirect materials and services, like cleaning supplies or maintenance contracts, offer evidence of these expenses.

Payroll records are essential for determining indirect labor costs, detailing wages and benefits paid to factory supervisors, quality control staff, and other support personnel. Utility bills, insurance policies, and property tax statements provide the amounts for these recurring overhead expenses. Depreciation schedules for factory assets are used to determine the depreciation expense for the period.

Calculating Your Total Manufacturing Overhead

After identifying and gathering indirect manufacturing cost data, the final step involves a summation to arrive at your total manufacturing overhead. This calculation provides a figure for the indirect expenses incurred during a production period.

To begin, create a detailed list of all the indirect manufacturing costs you have identified, such as indirect materials, indirect labor, factory rent, utilities, and depreciation. For each item on this list, input the numerical value. Ensure these values correspond to the correct period for which you are calculating the overhead.

Once all individual cost amounts are listed, simply add them together to determine the total manufacturing overhead. For example, if indirect materials were $5,000, indirect labor was $15,000, factory rent was $10,000, utilities were $3,000, and depreciation was $7,000, the total manufacturing overhead would be $5,000 + $15,000 + $10,000 + $3,000 + $7,000 = $40,000. This $40,000 represents the total manufacturing overhead for the specific period.