Manufacturing overhead costs

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Definition of manufacturing overhead costs
Indirect costs are considered as those costs, which do not have a clear identification with the specific activity or production units. Therefore, even though they are costs, which contribute to the company's achievement of output, they cannot be directly allocated to these targets. As examples of indirect costs, one might mention mechanical energy,heating, lighting, leases, etc.
An adequate cost analysis recommends that general indirect costs should be distinguished from the overhead costs affecting production, thus giving indirect production costs (overhead costs) as those related to the production cycle while the "general" indirect costs are the umbrella for cost factors attributable to the non manufacturing activities, such as: generaland administrative, marketing (or sales), research and development. Nonetheless, it is appropriate to point out that the inclusion of the latter costs in the calculation of the product's pricing will depend on the system costing employed.
To be more specific in the conceptual delimitation of the term, overhead costs might be defined as the cost of those factors contributing to the achievement ofthe corresponding output, with the exception for this purpose of direct costs (raw material and labour). Some of the factors making up this category might include: fuels; spares; depreciation of machinery; maintenance; inspection; quality control; supplies, etc.
As for the current cost structures in companies, it is worth mentioning the substantial change they have undergone both in quantitativeand qualitative terms, with a considerable increase in the indirect costs related to such activities as: production, sales, research, etc., with other factors traditionally considered significant becoming less relevant.
As a result of the increase in automation and mechanization affecting many of the productive processes, it is common to see a reduction in the direct labour cost and an increasein the costs associated with support activities such as: maintenance, adjustments, preparation of production equipment, etc.
This production model implies high costs in fixed assets investments as well as the maintenance of these investments, and the involvement more specialized staff. In general, the quantitative importance of the overhead costs is a direct function of the size of the company,of the technology it incorporates and of the characteristics of the markets in which it operates, as well as the type of product it sells.
Classification of manufacturing overhead costs.
Overhead costs can be classified with regard to various criteria; however, in this Document we analyse those considered most relevant for its purpose. With this in mind, the overhead costs can be classified:a) According to their nature, i.e. in terms of the cause leading to their appearance.
* Indirect materials and supplies: this will include the cost of those materials consumed throughout an accounting period but whose contribution to the output obtained cannot be established directly, either because it cannot be assigned physically or else because its analysis would involve additional costswhich would be much higher than the benefit to be derived from the precision in the calculation.
* Indirect factory labour: This concept represents the cost of labour, which cannot be directly related to specific units of production or cannot be assigned with them. It will, therefore, include all of the labour costs related to the production process and which have not been included as directlabour. The cost of "indirect labour" regularly (frequently) also include those costs arising out of the unproductive periods of both direct and indirect labour.
* Other indirect costs: this heading groups together the indirect production costs which have not been included as materials or indirect factory labour; this category of costs will, therefore, include a variety of overhead cost which are...
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