For a manufacturing company, is rent, and electricity (of production facility), a manufacturing overhead or is it non-manufacturing cost?
Rent and electricity expenses for a production facility in a manufacturing company are considered as manufacturing overhead costs. Manufacturing overhead costs are indirect costs that are not directly tied to specific products but are necessary for the production process to take place. Examples of manufacturing overhead costs include rent, utilities, depreciation of manufacturing equipment, factory maintenance, and indirect labor expenses.
To determine whether an expense is considered as manufacturing overhead or non-manufacturing cost, you can follow these steps:
1. Understand the nature of the expense: Determine whether the expense is directly related to the manufacturing process or if it supports other activities, such as administration or selling.
2. Assess the impact on the manufacturing process: If the expense directly contributes to the production of goods, it is considered as manufacturing overhead. These costs are typically allocated to products using different methods, such as activity-based costing or predetermined overhead rates.
3. Consult accounting standards: Refer to relevant accounting standards or guidelines, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), to ensure proper classification of expenses based on their nature and usage.
In the case of rent and electricity expenses for a production facility, these costs directly support the manufacturing process and are necessary for the production of goods. Therefore, they are categorized as manufacturing overhead costs.