In order to calculate manufacturing overhead, “identify each factory expense that is indirect labor or another indirect expense. Then add up all the indirect costs to find the manufacturing overhead.”
Explanation:
The manufacturing overhead is additional costs that are not directly related to the main production, not included in the remuneration of the central staff and the cost of raw materials. For the enterprise, such costs are no less important than direct costs, since they allow the entire company to operate.
The specifics of the manufacturing overhead are such that they cannot be immediately attributed to any particular type of products or services provided, but they cannot be ignored since this can lead to pricing errors.
Therefore, to determine the costs per unit of production, the manufacturing overhead calculation must be in proportion to the salary of the main staff, the cost of raw materials and supplies, and revenue. Organizations should determine how to allocate overhead costs, taking into account their specificity and scale of production.
The list and methods of determining overhead costs will vary depending on the industry sector of the organization, the number of its staff, objects of calculation, and other factors. If the manufacturing overhead costs are not correctly recorded, their cost overruns, the overstatement/understatement of the cost of production or services takes place, and the profit level decrease.
Rationing and control of expenses allow for their effective planning, and therefore improve the economic situation of the company. The manufacturing overhead formula may be as follows: Depreciation expenses on equipment used in production + rent of the factory building + wages or salaries of manufacturing managers + wages or salaries of material managing staff + property taxes paid for production unit + utilities of the factory.