Manufacturing Overhead

Manufacturing Overhead

Overhead is the ongoing expense that is generated from operating a business. Some examples of overhead are rent, utilities, payroll, and equipment. The term manufacturing overhead is defined as all factory cost that are incurred other than direct materials and direct labor.

There are many cost drivers associated with manufacturing. A cost driver is the unit of activity that causes a cost to be incurred. Some examples of indirect cost drivers are machine hours that cause maintenance problems, and vehicle repairs for a logistics company.

Over/under applied overhead is the difference between the estimated overhead cost and the actual overhead cost. For example, if a company estimates its overhead cost to be $150,000 (15,000 hours multiplied by $10 per hour) and it actually has $140,000 in overhead cost (14,000 hours multiplied by $10 per hour) then our company has over applied overhead of $10,000. In order to apply overhead a overhead rate must be determined. To determine an overhead rate, you must estimate the amount of activity, the manufacturing cost. In order to get the rate, the manufacturing overhead cost should be divided by the activity. Overhead is applied to work in process because actual activity causes actual overhead cost to be incurred and overhead to be applied to work in process inventory.

Activity based costing assigns cost of each activity to all products used according to the actual consumption. This is helpful because an organization can forecast and determine which products are profitable and unprofitable. I wen to school and I really enjoy it.