Manufacturing Overhead
All indirect production costs that cannot be traced directly to a specific product, including factory rent, utilities, depreciation, and indirect labor.
What is Manufacturing Overhead?
Manufacturing overhead encompasses all indirect costs associated with the production process that cannot be directly attributed to a specific unit of output. It includes indirect materials, indirect labor (such as maintenance workers and supervisors), factory rent, utilities, depreciation on production equipment, and property taxes on the plant. Because overhead cannot be directly traced to products, it must be allocated using a predetermined overhead rate based on a cost driver such as direct labor hours or machine hours. Accurate overhead allocation is critical for inventory valuation, product pricing, and profitability analysis.
Example
A plastics manufacturer estimates annual overhead of $1,200,000 and plans 60,000 direct labor hours for the year, giving a predetermined overhead rate of $20 per direct labor hour. A product requiring 3 labor hours is allocated $60 of overhead in addition to its direct material and direct labor costs.