What Is Fixed Manufacturing Overhead?

Fixed manufacturing overhead represents costs incurred within a production facility that do not change in total, regardless of the volume of goods manufactured. These expenses are indirect costs, not directly traceable to a specific product. Understanding this concept helps businesses manage their finances and determine product costs.

Understanding Fixed Manufacturing Overhead

Fixed manufacturing overhead costs remain constant in total. While the total cost stays the same, the fixed manufacturing overhead cost per unit decreases as production volume increases because the unchanging total cost is spread over a larger number of units. These costs support the overall manufacturing process but are not directly incorporated into the final product. They are also time-bound, incurred over specific periods like monthly or annually.

Common examples include factory rent or mortgage payments, which remain consistent regardless of production output. Depreciation of factory machinery and equipment also falls into this category, as the expense is recognized over time rather than based on usage. Property taxes and insurance premiums on the factory building are additional examples that do not fluctuate with production levels. Salaries of factory supervisors or quality control personnel, if their pay is independent of the number of units produced, are also considered fixed manufacturing overhead.

Distinguishing from Other Costs

Fixed manufacturing overhead differs from other cost classifications, particularly variable manufacturing overhead and non-manufacturing fixed costs. Variable manufacturing overhead changes in total directly with the volume of production. For instance, the cost of indirect materials, such as lubricants for machines consumed more heavily with increased production, or the wages of temporary production line workers whose hours fluctuate with output, are examples. If production ceases entirely, variable overhead costs would drop to zero, whereas fixed overhead would persist.

In contrast to manufacturing costs, non-manufacturing fixed costs are expenses incurred outside the production process. These costs are fixed in total but do not contribute to product creation. Examples include administrative salaries for office staff, rent for the corporate headquarters, or marketing and advertising expenses. These expenses are not included in the cost of manufacturing goods and are treated as period costs, expensed in the period they are incurred.

Its Role in Product Costing

Understanding fixed manufacturing overhead is important for accurately determining the total cost of a product. Since these costs are indirect, they must be allocated to the products manufactured. Companies often use a predetermined overhead rate to assign these costs, based on an allocation base such as direct labor hours, machine hours, or direct material costs. This process ensures each product bears a portion of these indirect costs, becoming part of its total cost.

The impact of fixed manufacturing overhead on per-unit cost is particularly important. This phenomenon is important for pricing decisions and understanding profitability at different production levels. Including fixed manufacturing overhead in product costs is also important for financial reporting under absorption costing, which is required by Generally Accepted Accounting Principles (GAAP) for external reporting in the United States. Under this method, fixed manufacturing overhead is included in the valuation of inventory on the balance sheet and subsequently in the Cost of Goods Sold when products are sold.