what is manfacturing overhead cost
Manufacturing overhead cost, also known as indirect cost, is the cost of operating a manufacturing process that cannot be attributed directly to a specific product. It includes expenses such as rent, utilities, insurance, depreciation, maintenance and repair costs for equipment, salaries of support staff, and any other costs associated with the manufacturing facility that are not directly related to the production of the units. These costs are necessary for the manufacturing process to operate, but they cannot be directly traced to a specific product or unit. The manufacturing overhead cost is usually allocated to units of production based on a predetermined overhead rate or formula.
Manufacturing overhead cost refers to the indirect costs associated with producing goods or providing services. These costs cannot be easily traced to a specific product or service, but are necessary for the production process.
Here are the steps to calculate manufacturing overhead cost:
1. Identify the indirect costs: Indirect costs include expenses such as rent, utilities, insurance, depreciation of factory equipment, maintenance, supplies, and salaries of production supervisors and support staff.
2. Assign the costs: Once the indirect costs are identified, they need to be allocated to the products or services. This can be done based on various allocation methods, such as using direct labor hours, machine hours, or square footage.
3. Calculate the allocation rate: To allocate the indirect costs, you need to determine the allocation rate. This is the ratio of your total indirect costs to the selected allocation base (e.g., total direct labor hours or total machine hours).
4. Determine the allocation amount: Multiply the allocation rate by the actual allocation base for each product or service to calculate the allocated manufacturing overhead cost.
5. Calculate total manufacturing overhead cost: Sum up all the allocated manufacturing overhead costs for each product or service to get the total manufacturing overhead cost.
It's important to note that manufacturing overhead cost is a necessary component in determining the total cost of production and is usually included in the calculation of product costs. It helps to cover the indirect expenses incurred during the manufacturing process.