Manufacturing Overhead

In the world of manufacturing–as competition becomes more intense and customers demand more services–it is important that management not only control its overhead but also understand how it isassigned to products and ultimately reported on the company's financial statements. We view overhead as two types of costs and define them as follows:

Manufacturing overhead (also referred to as factoryoverhead, factory burden, and manufacturing support costs) refers to indirect factory-related costs that are incurred when a product is manufactured. Along with costs such as direct material anddirect labor, the cost of manufacturing overhead must be assigned to each unit produced so that Inventory and Cost of Goods Sold are valued and reported according to generally accepted accountingprinciples (GAAP).



Manufacturing overhead includes such things as the electricity used to operate the factory equipment, depreciation on the factory equipment and building, factory supplies and factorypersonnel (other than direct labor). How these costs are assigned to products has an impact on the measurement of an individual product's profitability.



Nonmanufacturing costs (sometimesreferred to as “administrative overhead”) represent a manufacturer’s expenses that occur apart from the actual manufacturing function. In accounting and financial terminology, the nonmanufacturing costsinclude Selling, General and Administrative (SG&A) expenses, and Interest Expense. Since accounting principles do not consider these expenses as product costs, they are not assigned to inventory or tothe cost of goods sold. Instead, nonmanufacturing costs are simply reported as expenses on the income statement at the time they are incurred.



Nonmanufacturing costs include activitiesassociated with the Selling and General Administrative functions. Examples include the compensation of nonmanufacturing personnel; occupancy expenses for nonmanufacturing facilities (rent, light, heat,...