Manufacturing Overhead Formula

Formula to Calculate Manufacturing Overhead Cost

Manufacturing Overhead is a kind of cost that are incurred in the process of manufacturing the product, but those costs shall be indirectly associated with the process of manufacturing 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

Manufacturing-Overhead-Formula

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Source: Manufacturing Overhead Formula (wallstreetmojo.com)

 
NOTE: The above list is not exhaustive, it shall depend on case to case, and there could be another indirect costIndirect CostIndirect cost is the cost that cannot be directly attributed to the production. These are the necessary expenditures and can be fixed or variable in nature like the office expenses, administration, sales promotion expense, etc.read more which is incurred solely for the production unit, and those have to be considered while calculating the manufacturing overhead.

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 incur, 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

You can download this Manufacturing Overhead Formula Excel Template here – Manufacturing Overhead Formula Excel Template

Example #1

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

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

Example 1.1png

Therefore, the calculation of manufacturing overhead is as follows,

Manufacturing Overhead will be – 

Example 1.2png
NOTE: We shall ignore the depreciation on office building as it is not incurred indirectly for the production unit.

Example #2

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

  • Direct Labor: 176225
  • Direct Material: 310023
  • Rent of Production Property: 142830.00
  • Depreciation on Plant & Machinery: 71415.00
  • Property Taxes on Production Unit: 7141.50
  • Sales and Administrative Cost: 78599.00
  • Salaries of Production Staff: 107122.50
  • Utilities for Manufacturing Unit: 332131.00
  • Total 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 as well for costing purposes even though if one unit is still not manufactured.

Based on available information, you are required to estimate the cost which the finance head is expecting.

Solution

The finance head is referring to indirect overhead cost, which shall be incurred irrespective of whether the product is manufactured or not.

Therefore, the calculation of manufacturing overhead is as follows,

Example 2.1png

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

Manufacturing Overhead will be – 

Manufacturing Overhead Formula Example 2.2png
NOTE: Direct costs are associated with units produced, and sales and administrative are office expenses and hence have to be ignored during computation of factory overhead.

Example #3

A common size production sheet is available from the annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more of ABC motors inc. The analyst is trying to compute the total factory overhead cost. You are required to compute the Manufacturing Overhead.

  • 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%

Solution

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

Example 3.1png

Therefore, the calculation of manufacturing overhead is as follows,

Manufacturing Overhead Formula Example 3.2png

=456789.30+1141973.25+182715.72+593826.09+319752.51

Manufacturing Overhead will be – 

Manufacturing Overhead Formula Example 3.3png

Relevance and Uses

Many startup or single owned business while pricing the products fails to make a profit as most of them while pricing the product considers the competition level and only tries to recover the variable cost which is a direct costDirect CostDirect costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc.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 cost 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.

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