Home Accounting How To Calculate Manufacturing Overhead (All You Need To Know)

How To Calculate Manufacturing Overhead (All You Need To Know)

Wondering how to Calculate Manufacturing Overhead?

How can you calculate manufacturing overhead?

What’s important to know about it?

Keep reading as we have gathered exactly the information that you need!

Let me explain to you what Calculate Manufacturing Overhead is and why it’s important!

Are you ready?

Let’s get started!

How To Calculate Manufacturing Overhead

Knowing how much it costs you to manufacture a product or component is key to helping you budget, create your cash flow forecasts, and manage your overall costs.

Calculating your manufacturing overhead is important as it allows you to better assess how much money you are spending in your manufacturing process.

The manufacturing overhead costs are all the costs allowing you to smoothly run your production process.

It does not include direct labor and raw materials.

To calculate your manufacturing overhead, you’ll need to gather detailed information on your variable overhead costs such as rent, computer systems, factory supplies, factory utilities, and so on.

Let’s look at how you can calculate your manufacturing overhead costs.

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Step 1: Identify Your Manufacturing Overhead Costs

The first step is to identify all the manufacturing overhead costs that you incur to produce your goods.

Manufacturing overhead costs can include:

  • The rent you pay for your production facility 
  • Property tax on your production facility 
  • Your production facility insurance 
  • Depreciation of your manufacturing equipment 
  • Salaries paid to manufacturing personnel 
  • Salaries paid to quality control staff
  • Salaries paid to management 
  • Utilities paid for your factory

Step 2: Estimate Your Overhead Costs

Once you have determined the variable costs allowing you to help you produce smoothly, you then need to estimate how much each line item is costing you.

For example, determine how much rent you are actually paying for your production facility.

How much utilities are you paying for your factory?

You should estimate your costs for each of the manufacturing overhead costs that you identified.

Step 3: Determine Your Manufacturing Overhead Rate

The next step is to determine your manufacturing overhead rate.

The way you calculate your manufacturing overhead rate, you must take your total overhead costs, divide that by your total sales, and multiply the result by 100.

For example, if you have $1,000,000 in sales and $150,000 in manufacturing overhead, your manufacturing overhead rate will be 15%.

In other words, 15% of your sales will go to cover your manufacturing overhead costs.

Step 4: Determine Your Manufacturing Overhead Per Unit

To calculate your manufacturing overhead per unit, you must determine how many units you are producing so you can calculate your cost per unit.

For example, if you are producing 100,000 units costing you $1,000,000 in manufacturing overhead costs, it means that you are spending $10 per unit.

With this information, you will be able to estimate how much manufacturing overhead costs you may incur if you increase production from 100,000 to 200,000.

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Manufacturing overhead costs are considered indirect costs because it is not easy to link them directly to a specific product produced.

However, a company incurs these costs during its production runs to ensure everything runs efficiently.

Typically, the manufacturing overhead is applied to the final product based on a manufacturing overhead absorption rate.

There are different types of manufacturing overhead costs, such as indirect labor, indirect materials, utilities, physical costs, and financial costs.

Indirect labor is the cost of labor that is incurred by a company that is not directly related to the production of a product, such as security guards, janitors, repairmen, plant managers, quality inspectors, and so on.

Indirect materials are costs that cannot be linked to a specific product produced, such as machine lubricants, light bulbs, janitorial supplies.

Utilities are costs paid by the company that varies based on the production runs, such as natural gas, water, electricity, and others.

Physical costs are the costs associated with the physical location where products are produced, such as the manufacturing plant, depreciation of the factory, purchase of machines, machine repair costs, or other related costs.

The financial costs are costs such as property taxes on manufacturing plants, legal fees, insurance premiums, and so on.

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How To Calculate Manufacturing Overhead FAQ

What is manufacturing overhead?

Manufacturing overhead refers to all the indirect costs assumed by a company to produce goods.

These costs are not traceable to a specific product produced but are essential to allow a company to operate its manufacturing runs.

Such costs include maintenance workers, janitors, quality control staff, etc.

What is included in manufacturing overhead costs?

Manufacturing overhead costs are indirect costs assumed by a company to produce goods, namely:

  • Production facility rent
  • Production facility property taxes
  • Production facility insurance premiums 
  • Production facility depreciation
  • Production facility supplies 
  • Production facility utilities 
  • Production facility machinery 
  • Salaries of maintenance personnel
  • Salaries of facility managers
  • Salaries of quality control staff

How do you calculate manufacturing overhead?

You can calculate your total manufacturing overhead cost by adding up all the indirect costs you have identified relating to your production but that cannot be directly linked to the goods produced.

For example, if you paid a factory mortgage, maintained factory machinery, paid salaries to factory workers, and have property taxes to pay for your factor, the total of these costs will be your manufacturing overhead costs.

What is the manufacturing overhead rate formula?

To calculate your manufacturing overhead rate, you can use the following formula:

Manufacturing Overhead Rate = (Manufacturing Overhead / Sales) X 100
Author

You take all your manufacturing overhead costs, divide that by your sales and then multiply the result by 100.

How do you account for manufacturing overhead?

According to the Generally Accepted Accounting Principles (GAAP), companies are required to add their manufacturing overhead cost of direct materials and labor to their cost of goods sold and the value of their inventory.

These figures must be reported on the company’s balance sheet.

Recommended article: What is return on investment 

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Takeaways 

So there you have it folks!

How can you calculate your manufacturing overhead?

In a nutshell, a company’s manufacturing overhead represents all the indirect factory-related costs incurred by a company at the time of the manufacturing of a product.

Such costs include indirect materials, indirect labor, machine repairs, machine depreciation, manufacturing plant supplies, power supplies, rent, insurance costs, and more.

Manufacturing overhead costs do not include the variable costs associated with production, such as direct material and direct labor.

These are costs that companies must assume indirectly to ensure they can achieve smooth production.

To calculate your manufacturing overhead, you will need to identify your indirect production costs and add them all up.

Now that you know how to calculate your total manufacturing overhead, good luck with your research!

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Author

Amir K.
Hello Nation! I'm a lawyer by trade and an entrepreneur by spirit. I specialize in law, business, marketing, and technology (and I love it!). I'm also an expert SEO and content marketer. On this blog, I share my experience, knowledge, and provide you with golden nuggets of useful information. Enjoy! Feel free to connect with me on LinkedIn.

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