Manufacturing Overhead in Financial Accounting Explained

Manufacturing Overhead is all other costs of manufacturing that are incurred in the manufacturing process but cannot be directly traced to a specific product or job. The manufacturing overhead includes 3 types of costs: indirect material, indirect labor, and other manufacturing costs.

Unlike direct materials and direct labor costs, manufacturing overhead costs are not directly tied to the production of a specific product or job, but they are necessary for the overall operation of the manufacturing process.

These costs are allocated to products or jobs based on a predetermined rate, typically calculated as a percentage of direct labor costs, direct materials costs, or machine hours.

Examples of manufacturing overhead costs include rent, utilities, property taxes, maintenance, depreciation on equipment and buildings, insurance, salaries, and wages of indirect labor (such as maintenance personnel, supervisors, and quality control personnel).

The manufacturing overhead is also known as factory overhead or indirect manufacturing costs.

Indirect material

Indirect material costs are the cost of materials that are required for the production process but do not become an integral part of the finished product and cannot be easily traced to a specific product or job.

Materials that do become an integral part of the finished product but are insignificant in cost are also often classified as indirect materials.

Manufacturing overheads that are considered indirect materials will vary depending on the type of manufacturing process, industry, and business. These are examples of indirect materials:

• Lubricants, such as oil and grease, used to lubricate machinery
• Solvents used for cleaning equipment and work surfaces
• Adhesives and tapes used to hold materials in place during production
• Protective gear, such as gloves, masks, and safety glasses
• Abrasives used for grinding, sanding, or polishing
• Cleaning supplies, such as mops, brooms, and cleaning solutions
• Small tools, such as hammers, pliers, and screwdrivers, used in the manufacturing process
• Safety equipment, such as fire extinguishers, first aid kits, and emergency lighting
• Packing materials used for shipping and storage, such as pallets, boxes, and tape
• Stationery and office supplies used for record-keeping, such as pens, pencils, and paper.

Indirect Labor

Indirect labor costs are the costs of labor who do not work directly on the product, but whose services are necessary for the manufacturing process. These employees are essential to the manufacturing process, but their labor cannot be easily traced to a specific product or job.

Examples of indirect labor in manufacturing overhead include:

• Maintenance workers who repair and maintain equipment and facilities
• Quality control inspectors who ensure products meet industry standards and customer expectations
• Supervisors who oversee the manufacturing process and ensure production targets are met
• Janitorial staff who clean and maintain the manufacturing facility
• Safety personnel who ensure compliance with safety regulations and protocols
• Material handlers who move materials and products between production lines and storage areas
• IT support staff who maintain and troubleshoot computer systems and software
• Human resources staff who manage employee benefits, hiring, and payroll.

Other Manufacturing Costs

Other Manufacturing Costs (OMC) are all other manufacturing costs that cannot be classified as either indirect materials or indirect labor costs that are classified as manufacturing overhead.

These costs are considered part of the manufacturing overhead and are allocated to specific products or jobs based on a predetermined rate.

Other manufacturing costs (OMC) vary from business to business, depending on the nature of the manufacturing process and the industry. Examples of other manufacturing costs include:

• Rent and property taxes for the manufacturing facility
• Depreciation of building, machinery, and equipment used in the manufacturing process
• Utility bills, such as electricity, water, and gas
• Repairs and maintenance of machinery and equipment
• Insurance for the manufacturing facility and equipment
• Licenses and permits required for the manufacturing process
• Production supervision and administration costs
• Amortization of patents and trademarks used in the manufacturing process
• Research and development costs associated with the manufacturing process.