Manufacturing Overhead: Definition, Formula and Examples

Manufacturing Overhead: Definition, Formula and Examples

Manufacturing overhead is part of a company's manufacturing operations and is the costs incurred outside of those related to the cost of direct materials and labor. It is the sum of all indirect costs when creating a financial statement and appears on the balance sheet as the cost of a finished product in and inventory and work-in-progress inventory. It is based on a pre-determined overhead absorption rate, which is labor costs, labor hours and machine hours. There are five basic types of costs that are included in manufacturing overhead, which are indirect labor costs, security guards, janitors, those who repair machinery, plant managers, supervisors and quality inspectors. Companies discover these indirect labor costs by identifying and assigning costs to overhead activities and assigning those costs to the product.

Indirect Materials are costs that are incurred for materials that are not assigned to a specific product, such as lubricants for machinery, light bulbs and other janitorial supplies. Utilities are variable overhead costs that fluctuate with the number of materials being produced. Physical costs are calculated either by the declining balance method or a straight-line method, and financial costs are used when there is no pattern to the asset's loss of value.