Manufacturing overhead is all indirect costs incurred during the production process. These indirect costs include insurance, electricity, machine repairs and more.
These expenses are allocated to products so that they properly reflect the full cost of producing the good.
Formula to calculate manufacturing overhead.
= Depreciation Expenses on Equipment used in Production
(+) Rent of the factory building
(+) Wages / Salaries of manufacturing managers
(+) Wages / Salaries of material managing staff
(+) Property taxes paid for a production unit
(+) Utilities of the factory
Suppose you have a firm that produces cakes and the following are the costs of the production.
- Rent is $ 10,000
- Salary and wages of all the employees amount to $ 20,000
- Insurance for the whole business costs $ 3,000
- All the taxes amount to $ 5,000
Calculate the manufacturing overhead.
All we need to do is add all the costs.
= 10,000 + 20,000 + 3,000 + 5,000
Therefore, the manufacturing overhead is $ 38,000.