Manufacturing Overhead: Definition, Formula & Examples

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  • 0:02 Accurately Determining…
  • 1:04 Determining…
  • 1:46 Calculating…
  • 3:21 Lesson Summary
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Lesson Transcript
Instructor: Adam Gifford

Adam holds an MBA and a MS in Human Resources

In this lesson, we'll define manufacturing overhead, use the given formula to determine manufacturing overhead per unit and cite examples of the specific costs that are used to determine manufacturing overhead.

Accurately Determining Production Costs

Your friend Bort just called you to see if you can help him with his business. He owns an umbrella manufacturing company that sells umbrellas all over the world. Despite his large customer base, Bort is unable to maintain a profitable business. He wants you to look over his financial statements and see why his company is unable to make any money.

Bort explains to you that it costs him a total of $5 to manufacture a single umbrella. That breaks down into $3 of material and $2 in labor. He then sells the umbrellas for $7. He is confused as to why marking up his umbrellas $2 over the cost of production isn't earning him any profit. Even before you look over his accounting reports, you can already tell that he isn't making any money because he failed to consider his manufacturing overhead when determining his cost of production.

Definition of Manufacturing Overhead

Manufacturing overhead is defined as those costs that are incurred through the manufacturing process but that are not directly related to the manufacturing process. This means that you wouldn't include labor costs or material costs when determining manufacturing overhead.

Determining Manufacturing Overhead

There are a number of expenses that are used to determine manufacturing overhead. These expenses can include rent, utility bills, insurance, equipment maintenance and administrative costs. These costs are all incurred through the manufacturing process even though they have nothing to do with the materials that are used or the wages paid to the manufacturing employees.

A good way to think about which costs go in to determining manufacturing overhead is to look at the costs that are incurred to ensure that the manufacturing process can occur. Basically, you need a building, you need to insure that building, you need to take care of that building and you need to keep the utilities on in that building. All of those costs must be considered when determining manufacturing overhead.

Calculating Manufacturing Overhead Cost Per Unit

It is important to determine manufacturing overhead cost per unit produced so that you can profitably price your products. Here is the formula to determine manufacturing overhead cost per unit:

Manufacturing Overhead Per Unit = Total Manufacturing Overhead / Total Units Produced

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