Manufacturing overhead is all of the costs that a factory incurs, other than the variable costs required to build products, such as direct materials and direct labor. 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.
Manufacturing overhead is also known as factory overhead, production overhead, and factory burden.