At Deskera, manufacturing overhead is calculated by adding up all of the indirect expenses of producing inventory. It does not include direct labor or direct costs such as raw materials because these amounts can be traced directly back to a single product. For example, if a company’s factory requires more production during one month than another, variable manufacturing costs are higher during peak months. Because these costs vary with production levels, they are considered variable costs. On the other hand, fixed manufacturing overhead costs remain the same regardless of how much work employees perform. Overhead expenses are generally fixed costs, meaning they’re incurred whether or not a factory produces a single item or a retail store sells a single product.
Manufacturing costs are recorded as assets (or inventory) in the company’s balance sheet until the finished goods are sold. The key takeaway of this case study is that understanding the fluctuations in manufacturing costs can empower companies to make informed and timely choices between outsourcing and in-house production. These informed decisions help in maximizing productivity and profitability. Fabrizi also talked about the common challenges manufacturers face when calculating the costs of production.
Classification of Factory Overheads
In his experience, the most common challenges are a lack of accurate data and the complexity of costing methods. Start by making a list of all the direct materials that are used to make the specific product and obtain the cost information for the direct materials you have identified. Now that you are familiar with the components that manufacturing overhead costs include constitute manufacturing costs, let’s move on to the process of calculating these expenses. Manufacturing costs, also called product costs, are the expenses a company incurs in the process of manufacturing products. Overhead refers to the costs of running a business that are not directly related to producing a good or service.
General and administrative overhead traditionally includes costs related to the general management and administration of a company, such as the need for accountants, human resources, and receptionists. A company’s accounting department often estimates manufacturing overhead according to the budgeted number of units produced or products assembled during the period in question. It is an expense that covers ordinary costs related to a company’s manufacturing or production operations. Manufacturing overhead includes utilities, depreciation, employee benefits, and insurance. The factory overhead is the total of all costs (other than direct costs) incurred to maintain and run the production facility or factory. These costs include the physical items which are essential for manufacturing.
