What’s manufacturing overheads?

These hidden costs will keep building up on your statement unless you take the time to reduce the unnecessary ones and take back control. It’s the same thing when running a manufacturing business.

It’s easy for all your little costs for things like cleaning and security to get buried away and forgotten when you’re spending energy on making. This is why learning how to calculate manufacturing overhead can help to resolve this issue and bring to light all the costs you might have lost track of.

What is manufacturing overheads?

Manufacturing overhead refers to indirect costs incurred during production, such as utilities, rent, insurance, indirect labor, and materials. These costs are not directly tied to the production of specific goods but are necessary for the overall operation of a manufacturing facility.

Often without these things, you couldn’t run your manufacturing at all. But by breaking down your indirect costs, you can reduce?those pesky bills?that rarely come to the front of your mind.

Types of manufacturing overhead costs

There are just so many details that cost your business money, right? So, what does manufacturing overhead consist of?

Well, the first thing to remember here is that we’re just looking at indirect costs related to manufacturing.

Instead, we can break down manufacturing overhead costs into four sections:

1.????? Indirect labor

2.????? Indirect materials

3.????? Utilities

4.????? Depreciation

Fixed overhead vs. variable manufacturing overhead

·???????? Fixed overhead —?Manufacturing costs that do not change with the production volume, such as rent and property taxes

·???????? Variable overhead —?Manufacturing costs that vary directly with the volume of production, such as electricity and raw materials

1. Indirect labor

Indirect labor includes the salaries of anyone that works in your Factory but isn’t involved in the manufacturing process.

That means maintenance people, janitors, cleaners, security guards, supervisors, Quality workers, and anyone else that helps keep the ball rolling.

If their job indirectly affects your production or production facility, you should include their salary in your manufacturing overhead costs.

2. Indirect materials

These could include glue, tape, disposables, Consumables, repair parts, general supplies, cleaning chemicals, and wasted materials.

Estimated vs. applied vs. actual overhead

·???????? Estimated overhead —?Anticipated calculation of the total manufacturing overhead costs expected in a given period

·???????? Applied overhead —?Overhead costs that have been assigned or allocated to specific products or jobs

·???????? Actual overhead —?Total overhead costs that have been incurred during a given period

3. Utilities

This is one of those areas where the costs are almost always inevitable and constant. You’ll have to pay bills wherever the work gets done, right? Rent on the building, water bills, internet, electricity, gas, property tax, and even insurance.

Just remember that we’re looking at costs in relation to manufacturing, so your head office bills won’t be counted here.

4. Depreciation

depreciation refers to how much an asset decreases in value over time. This applies to equipment and facilities which?are subject to?wearing down.

Working out an estimate of that is a valuable addition to your manufacturing overhead. Plus, it can be used for tax claims deduction in some instances.

How to calculate manufacturing overhead cost

Small and medium manufacturers need to be extra aware of their manufacturing overhead because the effects of hidden costs are magnified at this scale. Without analyzing the details, your profits might not be as high as you first imagined.

Generally, manufacturing overheads are calculated per product annually. If you’re a small business, it’s going to be useful to do it even more often than that. The effects of your overheads could be quite drastic throughout the year, and you wouldn’t know until you checked. The first thing you need is the formula.

Manufacturing overhead formula

Calculating the manufacturing overhead is very straightforward once you know the indirect costs and the total units produced. All you need is the following manufacturing overhead formula:

?Manufacturing overhead =?Total indirect costs / total units produced

Indirect labor

Making skateboards can be a messy affair with so much paint and sawdust everywhere. There’s a cleaner that comes in to sort out all the mess that’s left at the end of the month. That comes to?$2,000 a year.

Indirect materials

Lots of bits and pieces get used in the factory that aren’t necessarily considered as direct costs — tapes for temporary fixes and bleach for cleaning. Not a lot of machinery is needed here, but a jigsaw needs its blade replaced every so often.?$500 a year?(yes, everything in this dream world happens to come to perfectly round numbers).

Utilities

Unfortunately, you can’t make hundreds of skateboards in your living room. So, you have to pay for Factory rent, bills, taxes, and the whole shebang. In this example, it comes to?$12,000 a year.

Depreciation

It’s quite strange to have to calculate how much value is being lost on your assets. Since we’re renting the Factory, there’s no property to account for, but we do have some machinery. If the jigsaw is estimated to last seven years and it costs?$1,050, then we could say that the annual depreciation is:

1,050 / 7 = $150

It might seem a little off the wall, but to be fair, this is a legitimate cost to your business. Now that we have all the numbers worked out, we can add them together and get our total indirect costs:

2,000 + 500 + 12,000 + 150 =?$14,650 a year

How to?find the manufacturing overhead per unit?

You have the total overhead. Now all you must do is, you guessed it, divide it by the total units produced. In this fantasy skateboard shop, there are?800?skateboards made a year. So, the total manufacturing overhead per unit is:

Manufacturing overhead per unit =?Total indirect costs / total units produced = 14,650 / 800 =?$18.31

There we have it. Our manufacturing overhead comes to around?$18 per skateboard. The accountant is happy, but that seems like quite a lot of extra costs, right?

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