Manufacturing Overhead can be termed as a fixed cost that is incurred as a result of normal operations of the business. As a matter of fact, it can be seen that this cost is incurred as a result of the production and manufacturing process that is carried out as a normal course of the business.
Broadly speaking, it can further be seen that manufacturing overheads can be defined as fixed costs that are associated with the production process but cannot be individually identified to a certain product.
As far as direct manufacturing overheads are concerned, they can be defined as the manufacturing overheads that are directly incurred as a result of the manufacturing process.
On the other hand, indirect manufacturing overheads are incurred within the production facility, but they are not directly related to the manufacturing process. The common element between both types of overheads is the fact that they are not directly traceable to an individual product.
Therefore, the main difference between manufacturing overheads and indirect overhead costs is the fact that manufacturing overhead costs are directly associated with producing certain products that are being offered. On the other hand, indirect costs are the costs that the business incurs, regardless of the manufacturing process.
As far as Manufacturing Overheads are concerned, it can be seen that there are numerous different types of direct manufacturing overheads that are directly relevant to the production process.
For example, machinery maintenance and depreciation cost can be treated as a manufacturing direct overhead.
However, since it cannot be directly associated with a specific product, it has to be applied to a product using a certain cost driver. In the same manner, other manufacturing overheads include product inspection costs, quality supervisor salaries, factory management team, and safety and environment costs.
According to accounting principles, manufacturing overheads need to be included in the Work in Process inventory, as well as finished goods inventory on a manufacturers’ balance sheet.
This is predominantly because of the reason that this is something that is related to the manufacturing process, and therefore, this should be reflected in the product costing.
In order to treat, and subsequently record manufacturing overheads, there is a need to select the allocation base, which links overhead cost to the cost object.
The main rationale here is to spread the overall cost across the number of items produced, to spread them evenly, or more accurately. This can be done using any significant cost driver like direct materials used, or direct labor hours.
To conclude, it can be seen that manufacturing overheads are regarding as fixed costs that are incurred across the course of time, but cannot be individually traced to a specific particular product.
In this regard, it becomes rudimentary to ensure that specific cost drivers are utilized to spread the overheads across the number of items that are produced across a given production cycle. The main rationale behind deciding cost drivers changes from cost to cost.
For example, machinery repair and maintenance is going to be divided using the number of labor hours utilized.