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Cost accounting is used by businesses to identify the expenses associated with manufacturing. A shoe
manufacturer, for example, uses cost accounting to track the materials used in its shoes, the labor hours
worked by its production workers, and all other factors considered by a traditional production budget.
Cost accounting differs from financial accounting, which is used by businesses to highlight overall
performance and to record assets and liabilities. Financial accounting follows strict guidelines and is
governed by the Internal Revenue Service and the Financial Accounting Standards Board (FASB). Cost
accounting is a firm-specific practice that is not governed by the government. For any given
manufactured object, such as a shoe, all associated costs are either direct costs or overhead costs.
Overhead costs need to be allocated to the cost object. To begin this process, the
company's accountants first need to identify the overhead costs associated with the production of the
object. Treating manufacturing overhead as part of the cost of each product can help you effectively
price your products for profit. Many companies mistakenly think that the cost of goods manufactured
is labor plus materials only. Use manufacturing overhead to your advantage by counting it in the cost
of each item manufactured. In this way, you price your products to pay the bills and a produce a
profit.

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In an inflationary environment, rising overhead expenses can force you to raise prices on your
products, even if materials and labor do not rise. You have to make enough from your products to
keep up with facility costs, and the only place to get this money is from the prices for which you sell
your products. Failing to control overhead costs could price you out of the market.

Cash Flow Disadvantages, overhead costs continue even if you are not manufacturing. That means you
have to keep spending cash on overhead during machine outages or other manufacturing downtime.
You could find wind up spending cash while not earning cash. You should keep an emergency fund to
cover manufacturing overhead during non-manufacturing periods.

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What Is Included in Manufacturing Overhead? You need more than labor and raw materials to
manufacture products. Manufacturing units need factory supplies, electricity and power to sustain their
operations.

Examples of manufacturing overhead costs are:

 Rent of the production building

 Property taxes and insurance on manufacturing facilities and equipment
 Communication systems and computers for a manufacturing facility
 Depreciation on manufacturing equipment
 Salaries of maintenance personnel
  Salaries of factory management team
 Salaries of the material handlers
 Salaries of the quality control staff
 Factory supplies not directly associated with products
 Utilities for factory
 Janitorial staff wages
All the items in the list above are related to the manufacturing function of the business. These costs
exclude variable costs required to manufacture products, such as direct materials and direct labor.