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Manufacturing overhead, or factory overhead, includes indirect costs incurred during the manufacturing process, such as supervision, equipment depreciation, and supporting departments. Accountants must correctly allocate these expenses and keep up with government regulations to calculate taxes owed.
Also known as manufacturing or factory overhead, manufacturing overhead involves costs incurred as part of the actual manufacturing process. Typically, this form of overhead does not include costs such as direct labor or the actual materials used in the manufacturing process. This means that production overhead costs concern expenses that are considered indirect, but still related to production.
There are several examples of necessary expenses that are classified as manufacturing overhead. While direct labor, or labor that actually engages in the physical act of production, is not included, other forms of labor are considered part of this type of overhead. Supervisors who oversee specific aspects of the manufacturing process are considered indirect labor and are therefore counted as part of manufacturing overhead. Employees who repair damaged machinery or tend to the general building structure are also considered part of the factory overhead, as their efforts help support direct marketing efforts, but are classified as indirect costs.
Depreciation is also part of the manufacturing overhead calculation. This includes the depreciation of buildings used in the manufacturing operation, assuming those buildings are owned by the business. The same goes for the equipment used in the manufacturing process; as the equipment ages, its value depreciates a little bit each year. The current level of depreciation is accounted for in the company’s financial records as manufacturing or production overheads, thus effectively accounting for this change in value.
There are other expenses that are routinely counted as manufacturing overhead. Departments that support the manufacturing process are listed in this category. This would include any quality control personnel, any departments involved in evaluating and formulating efficiency procedures, printed forms, and other supporting materials that support but are not directly used in the manufacturing process, and even leased to a manufacturing facility.
Part of the accounting team’s job is to identify what does and does not constitute manufacturing overhead, sometimes in light of applicable government regulations. Accountants must also correctly allocate these expenses in the financial records and associate these costs with the units produced under the production process as and when appropriate. For this reason, the company’s finance department must keep abreast of any changes in government regulations that may affect what may and may not be identified as manufacturing overheads, and adjust accounting records to comply with those regulations. This makes the process of calculating the taxes owed by the business a much easier process.
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