Formula to Calculate Manufacturing Overhead Cost

Manufacturing Overhead is a kind of cost incurred in manufacturing the product, but those costs shall be indirectly associated with the process of manufacturing the product. Below given is the formula that is used to calculate manufacturing overhead,

Manufacturing Overhead Formula = 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

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Explanation

Manufacturing OverheadManufacturing OverheadManufacturing Overhead is the total of all the indirect costs involved in manufacturing a product like Property Tax on the production premise, Remunerations of maintenance personnel, Rent of the manufacturing building, etc. read more are the costs incurred, irrespective of the goods manufactured or not. These are mostly fixed in nature and occur along with the start of the production unit. It generally includes rent of the production unit, wages, and salaries paid to factory employees and managers, quality department employees expenses, people who inspect the products, electricity, sewer, etc., for operating manufacturers’ equipment, property taxes, and insurance for the production unit. Simply taking a sum of that indirect cost will result in manufacturing overhead.

Examples

Example #1

Product JM is prepared, and it incurs a lot of overhead costs. The production head gives the details as below:

  • Rent of Production Property: 100000.00Depreciation on Plant & Machinery: 50000.00Depreciation on Office Building: 30000.00Property Taxes on Production Unit: 5000.00Salaries of Production Staff: 75000.00

You are required to calculate manufacturing overhead based on the above information.

Solution

Use the above-given data for the calculation of manufacturing overhead.

Therefore, the calculation of manufacturing overhead is as follows,

Manufacturing Overhead will be – 

Example #2

Samsung Inc. is planning to launch a new product called A35 and is deciding upon the product’s pricing as the competition is fierce. The production department has provided the finance head with the details of the existing model A30, which is equivalent to A35.

  • Direct Labor: 176225Direct Material: 310023Rent of Production Property: 142830.00Depreciation on Plant & Machinery: 71415.00Property Taxes on Production Unit: 7141.50Sales and Administrative Cost: 78599.00Salaries of Production Staff: 107122.50Utilities for Manufacturing Unit: 332131.00Total Cost for A30: 1225487.00

The finance head has asked the cost accountant to calculate the overhead costOverhead CostOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more, which shall be incurred for A35 and costing purposes even if one unit is still not manufactured.

Based on available information, you are required to estimate the cost the finance head expects.

The finance head refers to indirect overhead cost, which shall be incurred irrespective of whether the product is manufactured.

= 71,415.00 +  1,42,830.00 +  1,07,122.50 +  7,141.50 + 3,32,131.00

Example #3

You are required to compute the Manufacturing Overhead. A common size production sheet is available from the ABC motors inc annual report. The analyst is trying to compute the total factory overhead cost.

  • Rent of Production Property: 10.00%Depreciation on Plant & Machinery: 25.00%Property Taxes on Production Staff: 4.00%Salaries of Production Staff: 13.00%Production Sunk Cost: 7.00%

The below percentage was based on gross revenue and gross revenue for that period was  45,67,893.00

=456789.30+1141973.25+182715.72+593826.09+319752.51

Relevance and Uses

Many startup or single-owned businesses, while pricing the products, fail to make a profit as most of them, while pricing the product, consider the competition level and only try to recover the variable cost, which is a direct costDirect CostDirect cost refers to the cost of operating core business activity—production costs, raw material cost, and wages paid to factory staff. Such costs can be determined by identifying the expenditure on cost objects.read more. Hence, the manufacturing overhead or factory overheads must be considered and taken into account while pricing the product and should be recovered to make the firm profitable. These are the costs incurred to make the manufacturing process keep going. Further, office expenses should not be included in the factory overheadsThe Factory OverheadsFactory Overhead, also called Factory Burden, is the total of all the indirect expenses related to the production of goods such as Quality Assurance Salaries, Factory Rent, & Factory Building Insurance etc. read more.

This article has been a guide to Manufacturing Overhead Formula. Here we discuss how to calculate overhead manufacturing costs using its formula, practical examples, and a downloadable excel template. You can learn more about financing from the following articles –

  • Calculate Overhead RatioFixed cost vs Variable costMeaning of Period CostsMeaning Of Period CostsPeriod cost refers to all those costs which are not related or tied with the production process of the company i.e., they are not assigned with any of the particular product of the company and are thus shown in the financial statement of the company for the accounting period in which they are incurred.read moreProduct CostProduct CostProduct cost refers to all those costs which are incurred by the company in order to create the product of the company or deliver the services to the customers and the same is shown in the financial statement of the company for the period in which they become the part of the cost of the goods that are sold by the company.read more