Finance For

Non-
Financials
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Manufacturing
Overheads
03/07/2021

Shared Knowledge = Shared Values

Data Collected By: Hamed Ali
 July 3, 2021 [MANUFACTURING OVERHEADS]

Article Subject Manufacturing Overheads.

Data collected by Hamed Ali Mohamed, Master in food science & bio-technology
E-mail Hamed.ali.mohamed1982@gmail.com Address Eastern Provence, KSA

Release Date 03/07/2021 Doc. Ref (FU)/KSA – 2021 – 07 - 04

Manufacturing Overheads

Introduction to Manufacturing Overhead

Manufacturing overhead can be termed as the costs/expenses related to all manufacturing
activities that occur during the course of production other than direct materials and direct
labor. Thus, Manufacturing costs can be termed as an indirect cost. For example,
depreciation, rents and property taxes, salaries, repairs and maintenance, electricity bills are
indirect costs. Manufacturing overheads are indirect in nature and hence to some expense
these are fixed and are not affected by the number of units produced in the production
facility.

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Constituents of manufacturing overheads can be summed up as follows:

It incurred during the production process comes under indirect costs. It is applicable during
the production of any product. Let’s go through the following types of manufacturing
overheads.
• Depreciation or amortization calculated on Fixed assets like machinery, property, Land,
buildings, etc.

• Taxes related to the property of any factory where production commences.

Rent of the factory or the production facility, if any

• Salaries paid to the maintenance

• Salaries paid to managers, who conduct the manufacturing

• Salaries paid to the materials management staffs

Salaries paid to quality control staff

Supplies not directly associated with products (such as manufacturing forms)
Examples of Manufacturing Overhead
Examples of manufacturing overhead are given below:
Example #1
Expenses related to a production facility are given below as –
Rent and taxes, wages to labor, salary to production manager, direct material costs, the
salary of cost control personnel, depreciation of the machinery, depreciation of the car used
in logistics purpose. Segregate manufacturing overhead from the above costs.
Solution:
The above costs can be categorized as:
Manufacturing Overhead: Rent and taxes, a salary of cost control personnel, depreciation
of the machinery, depreciation of the car used in logistics purpose.
Others are direct costs as wages paid to labor, direct material costing are included within
costs of goods sold and are termed as direct costs or direct expense.
Example #2
When salaries of employees (under manufacturing overhead) rises, the fixed costs per
product also tends to increase. Thus, the price of the product also tends to be higher. The

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above phenomenon leads to create abnormal pricing of the product and a decrease in the
demand of the product.
Advantages and Disadvantages
Here we discuss the advantages and disadvantages:
Advantages
Some of the advantages are as follows:
• Manufacturing overhead is basically indirect costs and is not directly related to the
production process.

• Direct costs are most of the time variable in nature, while indirect costs remain constant. For
example, insurance paid for the manufacturing facilities are fixed and does not depends on
the number of units produced while payment made of labor and quantity of raw materials are
variable in nature and hence the cost is also variable.

• The expense related to manufacturing overheads is always fixed. Thus, finance managers
who allocate the budget get a clear idea about the budget required for the manufacturing
overheads even if the person is unaware about the production status for the entire calendar
year.

• Manufacturing overheads gives an idea about the business entity. For example, if the
business employs much personnel for quality check or quality control, then it gives a brief
about the employer’s mindset which appears to be good. As the person is focusing on the
safety of the production unit.

• Manufacturing overhead is fixed in nature and is not related to the number of units
manufactured by the business. In the case of overproduction, the costs of manufacturing
overhead remain fixed and thus it does not hinder the employer’s pocket. For example,
Depreciation related to a production facility is fixed, no matter how much quantity is
produced.

• The manufacturing overheads are subjected to tax deductible in nature and hence it saves a
good amount for the business.

Disadvantages
Some of the disadvantages are as follows:
• When the costs are fixed the business has to manufacture a certain number of units to reach
the break-even. For example, if a business has a fixed manufacturing overhead of $1,000 and
the sell price of the product is $10/ unit, then the number of units that needed to be produced
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will be $1000/10 or 100 units. Thus manufacturing at least 100 units and selling all the units
will give the business to receive the minimum costs of production.

• Sometimes a wrong budgetary estimate can lead to higher manufacturing overhead.

Manufacturing overheads are fixed in nature and they do not have any co-relation with the
unit manufactured. If the cost accountants do a wrong calculation in doing cost sheets, then it
may end up to higher expenses irrespective of the number of units produced.

• Higher manufacturing overheads leads to higher prices of the products. Thus, if the industry
is giving a higher amount to overheads there is bound to be an inflationary condition in the
economy.

• Sometimes there is a negative correlation between the manufacturing overheads and the
direct costs. Thus, in this scenario, the labor class tends to suffer while the salaried personnel
remains on the safer side. On the other hand, the prices of the products across every segment
tend to increase, thus the real value of money falls.

• Higher product prices may lead to shrink in demand. We all know the demand curve in
Economics. When the prices tend to go higher, the demand of the products shrinks as the
affordability of the consumer decreases and consumers shift towards substitutes.

Limitations of Manufacturing Overhead

Some of the Limitations are as follows:
• In most cases, the cost accountants are involved with the budgetary allocations and unaware
of the current market scenario of the products and hence fail to determine the overall demand
of the product, which leads to higher manufacturing overheads and higher selling prices of
the product.

• Its fixed in nature, so in case of under production, the business will tend to run through
losses.

References: -
- www.educba.com.
- www.wallstreetmojo.com.
- www.Investopedia.com

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