Manufacturing overhead is all indirect costs incurred during the production process.

This
overhead is applied to the units produced within a reporting period. Examples of costs that are
included in the manufacturing overhead category are:

 Depreciation on equipment used in the production process

 Property taxes on the production facility

 Rent on the factory building

 Salaries of maintenance personnel

 Salaries of manufacturing managers

 Salaries of the materials management staff

 Salaries of the quality control staff

 Supplies not directly associated with products (such as manufacturing forms)

 Utilities for the factory

 Wages of building janitorial staff

Since direct materials and direct labor are usually considered to be the only costs that directly
apply to a unit of production, manufacturing overhead is (by default) all of the indirect costs of
a factory.

Manufacturing overhead does not include any of the selling or administrative functions of a
business. Thus, the costs of such items as corporate salaries, audit and legal fees, and bad debts
are not included in manufacturing overhead.

When you create financial statements, both generally accepted accounting principles and
international financial reporting standards require that you assign manufacturing overhead to the
cost of products, both for reporting their cost of goods sold (as reported on the income
statement), and their cost within the inventory asset account (as reported on the balance sheet).
The method of cost allocation is up to the individual company - common allocation methods are
based on the labor content of a product or the square footage used by production equipment. it
is also possible to use multiple allocation methods. Whatever allocation method used should be
employed on a consistent basis from period to period.
he range of possible factory overhead costs can be quite extensive, depending upon the size and
complexity of a factory operation and the level of detail at which costs are recorded.

After factory overhead is allocated to inventory, the amount actually allocated will vary from
the standard amount that had been budgeted to be allocated. This difference is caused by either
a spending variance or an efficiency variance. The spending variance occurs because the actual
amount of factory overhead expenditure incurred in the period was different from the standard
amount that had been budgeted at some point in the past. The efficiency variance occurs
because the the amount of units to which the factory overhead was allocated varied from the
standard amount of production that had been expected when the allocation rate was set up.

The use of factory overhead is mandated by accounting standards, but does not bring real value
to the understanding of overhead costs, so a best practice is to minimize the complexity of the
factory overhead allocation methodology. Ideally, there should be a small number of highly
aggregated factory overhead accounts that are pooled into a single cost pool, and then allocated
using a simple methodology. Also, the amount of factory overhead analysis and recordation
work can be mitigated by charging all immateri

Manufacturing overhead costs (MOH cost) are all manufacturing costs that are related to the cost
object (work in process and then finished goods) but cannot be traced to that cost object in an
economically feasible way.
Examples include supplies, indirect materials such as lubricants, indirect manufacturing labor such
as plant maintenance and cleaning labor, plant rent, plant insurance, property taxes on the plant,
plant depreciation, and the compensation of plant managers.
This cost category is also referred to as Factory overhead cost (FO cost).

Items of the overhead[edit]

Manufacturing overhead includes other costs in manufacturing that are neither direct materials costs
nor direct labor costs. It might also be referred as the factory burden or production overhead. Its
value is essential for determining the cost of products to be manufactured.
This category of costs includes expenses like:

1. Electricity for the equipment and lighting.

2. Cleaning costs of equipment.
3. Material handling like forklifts
4. Maintenance of the equipment.
5. Wages of employees in the factory who for example work on record keeping and inspection
of materials.
6. Computing the operation of the process of manufacturing the product.
 7. Insurance
8. Safety and quality cost.
9. Plant Repairs
Source: Cornerstones of Managerial Accounting 4th edition-Chapter 2: Depreciation on plant
buildings and equipment, janitorial and maintenance labor, plant supervision, materials handling,
power for plant utilities, and plant property taxes.

Manufacturing overhead – also called indirect costs – are any costs that a factory incurs other than
direct materials and direct labor needed to manufacture goods, notes "Accounting 2," a reference
guide. In cost accounting, manufacturing overhead is applied to the units produced within a reporting
period, according to Accounting Tools, a website that offers professional accounting courses and
materials.

What Is Manufacturing Overhead?

In cost accounting, every unit a factory or company produces has some percentage of
manufacturing overhead, costs added to each unit it produces. Accounting Tools gives some
examples of manufacturing overhead in cost accounting including:
 Depreciation equipment used in the production process
 Property taxes on the production facility
 Rent on the factory building
 Salaries of maintenance personnel
 Salaries of manufacturing managers
 Salaries of the materials management staff
 Salaries of the quality control staff
 Supplies not directly associated with products (such as manufacturing forms)
 Utilities for the factory
 Wages of building janitorial staff

Although these are some of the most important and prevalent examples of manufacturing overhead,
it's important to understand how these examples figure into the total cost of every item a factory or
company produces. Essentially, manufacturing overhead includes all of the hard-to-define costs
associated with making products, yet they still need to be accounted for when determining the true
cost of creating a part or product, hence the term manufacturing overhead, which, by definition, is an
indirect cost.

Manufacturing Overhead: The Indirect Costs

Manufacturing overhead includes all of the indirect costs that go into creating any given parts, or
even finished products, ranging from widgets to tennis rackets to automobiles. The indirect costs do
not include labor and materials, which are considered direct cost_s, and are not accounted for as
manufacturing overhead. So, the steel needed to make the widget, as well as the salary of the
laborers who are _directly involved in producing that widget, would be a direct cost, and thus not
manufacturing overhead. Likewise, the strings, wood, and any other parts needed to produce the
tennis racket, as well as the pay for any workers producing any part of the racket, would be direct
costs, and again, would not be considered to be part of manufacturing overhead. As Accounting
Tools explains:
"Since direct materials and direct labor are usually considered to be the only costs that directly apply to a unit of production,
manufacturing overhead is (by default) all of the indirect costs of a factory.

Companies and their accountants need to be able to determine exactly what are these hard-to-

define costs, the manufacturing overhead. If you were to omit manufacturing overhead from the true
cost of making every given unit or part, you would not have a true value as to what the part or unit
actually costs to produce. Take depreciation, for example, which is perhaps one of the key examples
of manufacturing overhead in cost accounting. Investopedia defines depreciation as "the allocation
of the cost of an asset over a period of time for accounting and tax purposes."

In other words, depreciation is the value that an asset decreases year by year due to factors like
wear and tear and obsolescence. Many people know that depreciation is often an important concept
in calculating taxes. Companies can often claim a certain amount of depreciation as a deduction
when tax times comes around. So, if a machine used in making tennis rackets cost $100,000
initially, it might depreciate $10,000 per year, until its value is zero after 10 years (10 x $10,000).

Every part a factory makes causes the machine(s) used to make that unit depreciate little by little,
day by day, week by week, and month by month. But, figuring out exactly how much a machine
depreciates for every single unit a factory makes is a mind-boggling task for accountants, who must
determine how much that depreciation adds to the cost of each unit. Remember, depreciation is only
one of the examples of manufacturing overhead associated with the producing of each and every
single unit a factory produces. Accounting Coach explains the conundrum for accountants:
"Because manufacturing overhead is an indirect cost, accountants are faced with the task of assigning or allocating overhead costs
to each of the units produced. This is a challenging task, because there may be no direct relationship. (For example, the property
tax on the factory building is based on its assessed value and not on the number of units produced. Yet the property tax must be
assigned to the units manufactured.)"

Clearly, accountants don't simply guess when determining manufacturing overhead. But they also

can't actually figure the true, exact cost of, say, property taxes that must be added to producing
every unit or part. To get around this, cost accountants have a method for determining
manufacturing overhead.