Manufacturing overhead costs

Definition

Manufacturing overhead costs are indirect costs associated with the production process but not directly traceable to a specific product. They include expenses like utilities, depreciation, and factory supplies.

5 Must Know Facts For Your Next Test

1. Manufacturing overhead must be allocated to products to accurately determine their total cost.
2. Common allocation bases for manufacturing overhead include direct labor hours, machine hours, and direct labor costs.
3. Predetermined overhead rates are calculated before the period begins by dividing estimated total manufacturing overhead by the estimated total amount of the allocation base.
4. Under absorption costing, manufacturing overhead is included in the cost of goods sold and inventory values.
5. Variable costing treats only variable manufacturing costs as product costs; fixed manufacturing overhead is expensed in the period incurred.

Review Questions

• What are some typical components of manufacturing overhead costs?
• How do you calculate a predetermined overhead rate?
• Why is it important to allocate manufacturing overhead to products?

Related terms

Predetermined Overhead Rate: A rate used to apply manufacturing overhead to products, calculated as estimated total manufacturing overhead divided by estimated total amount of the allocation base.

Variable Costing: A costing method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) as product costs.

Absorption Costing: A costing method that includes all production costs (direct materials, direct labor, and both fixed and variable manufacturing overhead) as product costs.