Learn which costs may belong in manufacturing overhead and when outdated overhead rates may affect margins, pricing, and business decisions.
Profitable growth in manufacturing starts with understanding what it costs to produce your products. Outdated or incomplete overhead rates can distort product margins, obscure underused capacity, and influence pricing decisions based on unreliable cost information.
Keeping overhead rates aligned with operations provides a stronger foundation for evaluating profitability and making informed business decisions.
What's included in manufacturing overhead?
Manufacturing overhead includes production-related costs that can’t be directly traced to a specific product, job, or production order.
The appropriate treatment depends on the nature of each expense and how it supports production. Job titles and general ledger account names alone may not provide enough information to determine the appropriate classification.
Common categories include:
Indirect production labor
Production supervisors, maintenance employees, quality personnel, material handlers, manufacturing engineers, and other plant support roles.
Employee-related costs
Payroll taxes, insurance, retirement contributions, paid time off, and other benefits associated with production employees.
Facility costs
Factory rent, depreciation, property taxes, insurance, utilities, repairs, and other occupancy expenses.
Machinery and equipment costs
Equipment depreciation, leases, maintenance, repairs, operating supplies, and utilities.
Production support costs
Shop supplies, safety equipment, quality testing, waste handling, internal material movement, and production-related technology.
Payroll-related fringe benefits
Businesses may classify payroll-related fringe benefits differently. Some fully load these costs into direct labor, while others include them in manufacturing overhead. Either approach may be appropriate, but the methodology should be applied consistently and understood when calculating and analyzing variances.
Explore more: How manufacturers can capitalize overhead and labor expenses for an audit
What costs are excluded from manufacturing overhead?
Sales, marketing, corporate administration, outbound distribution, interest expense, and other non-manufacturing costs generally remain period expenses.
Some costs support both production and administrative activities. Utilities, insurance, technology, human resources, and facility costs may require additional analysis to determine the appropriate treatment. Abnormal waste, spoilage, and idle capacity also warrant careful consideration.
When should overhead rates be updated?
Manufacturers may want to revisit overhead rates after significant changes in wages, staffing, equipment, production processes, product mix, facility costs, or production volume. Recurring variances may also indicate existing rates no longer reflect operations.
How CLA can help manufacturers determine overhead rates
Reliable overhead rates can provide greater visibility into product margins, pricing, capacity, and plant performance. Periodically evaluating the costs supporting production can help manufacturers determine whether their overhead rates continue to reflect operations.
Manufacturers uncertain whether their overhead rates reflect current operations may benefit from a conversation with CLA’s manufacturing team. Reach out for a personalized analysis.