Month End Glossary

Manufacturing Overhead

Manufacturing Overhead refers to the indirect costs incurred during the production process that are not directly tied to the raw materials or labor but are essential for manufacturing.

Manufacturing Overhead, often referred to as indirect or factory overhead, encompasses all the costs associated with the production process that are not directly traceable to specific products. These costs include utilities (like electricity and water used in the factory), maintenance on production equipment, factory rent, property taxes on production facilities, and the salaries of manufacturing supervisors.

For example, if a shoe manufacturing company incurs costs for the glue used to assemble the shoes, the rent for the manufacturing plant, and the salary of the factory manager, then rent and the manager's salary would be classified under manufacturing overhead. While the glue might be a direct cost, the other mentioned expenses are necessary but cannot be directly attributed to a single shoe produced.

Manufacturing overhead is an integral component of the total cost of manufacturing and is significant for accurate product costing. Businesses often allocate overhead using predefined rates based on machine hours, labor hours, or other activity drivers.

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