Manufacturing Overhead Costs: Definition and Examples

Manufacturing overhead (MOH) cost is the sum of all the indirect costs which are incurred while manufacturing a product. It is added to the cost of the final product along with the direct material and direct labor costs. Usually manufacturing overhead costs include depreciation of equipment, salary and wages paid to factory personnel and electricity used to operate the equipment.

Manufacturing Overhead Definition – What is Manufacturing Ov

Examples of manufacturing overhead

Here are some common examples of manufacturing overhead that a company may have:

What is manufacturing overhead?

Manufacturing overhead is any cost not directly related to a facilitys production. The indirect costs in manufacturing overhead can also be called factory overhead, production overhead or factory burden. Direct costs, like the price of material and labor, are directly related to a facilitys manufacturing efforts, and therefore arent part of the manufacturing overhead.

The three types of overhead costs are:

How to reduce your manufacturing overhead

If your organization is looking to reduce and better manage overhead costs, consider these steps:

1. Budget for a higher estimate of overhead costs

Every month, calculate your facilitys estimated overhead costs. You can use past bills, statements and records to determine how much you should allocate for overhead in your budget. Consider setting aside an amount over your estimate to account for any potential repairs or other unforeseen costs. If you do not use that additional money for those costs, you can have those funds saved for future use should a larger expense arise.

Repeating this process every month can help you identify areas of improvement and potential increases or decreases in costs. Also, knowing your businesss estimated overhead can tell you how much money your business needs to earn to make up for that expense. This step can help you set efficient production goals for floor teams.

2. Perform preventative maintenance

Keeping your equipment up to date and maintaining it can ensure it operates efficiently and lasts longer. Preventative maintenance can save money on equipment costs, such as repairs and replacements. Adding lubricants and cleaning a machine might cost a small amount of money upfront, but it can reduce the likelihood of having to replace equipment due to neglect and overuse.

3. Reuse old equipment parts

Check your storeroom for salvageable parts that can be used in minor repairs—if you ensure that they are compatible and in good working condition. For example, a part that was removed from an old piece of equipment might be able to be used as a replacement. This step can help reduce repair costs related to buying replacement parts.

4. Hire an in-house maintenance professional

An in-house repair professional can perform routine checks, preventative maintenance and minor repairs on your equipment. This hiring decision could save money on unexpected repair costs or work fees for an external repair vendor. Having an on-site person who can also perform emergency repairs could prevent you from paying an outside person overtime or extra costs if your equipment breaks after operation hours.

5. Communicate overhead reduction goals with employees

You can set specific reduction goals related to certain numbers your budget should aim for. These can help you establish team goals that contribute to that reduction.

Consider bringing these goals to your employees and brainstorm some ways the production line can reduce costs. Since your employees operate the equipment and perform manufacturing labor, they may have some ideas on how to improve the process. For example, your employees can inform you of any frequent malfunctions or struggles they see, such as material that gets ruined each time it is placed in a machine. The replacement material might be slightly more costly, but it will save you money because you will not be wasting materials.

You can also evaluate your employees to see if there are individual or team processes that impact production efficiencies, such as misuse of equipment or a long operational process. You can then collaborate with direct supervisors and floor teams to identify streamlining processes that work better for them and can save time and money. This process can be done to determine potential areas of improvement or to understand the effectiveness of newly implemented strategies.

6. Build strong relationships with vendors

Vendors sometimes offer discounts or specialized contracts to valued customers. Consider becoming a loyal patron of a few select vendors to show your support and appreciation for their help in making your production possible.

You can also communicate your overhead reduction goals with your vendors to see if they have any bulk options for materials, such as gloves or safety glasses. Many times, the bulk cost can save you money.

7. Reduce the need for office supplies

Consider going paperless to help reduce costs related to office supplies. Send company emails rather than printing paper fliers, announcements and invitations to company events. This step can reduce the paper budget and the need for pens and pencils, correctional tape and other office supplies.

8. Rent out extra space

If you have extra or unused rooms in your facility, consider renting them out to small businesses or organizations to help pay the rental or mortgage costs on your building. You may have some employees that are not always required to work in-office, so you could consider letting them work from home to free up possible rental space.

FAQ

What is meant by manufacturing overheads?

Manufacturing overhead (MOH) cost is the sum of all the indirect costs which are incurred while manufacturing a product. It is added to the cost of the final product along with the direct material and direct labor costs.

What is production overhead example?

Production overhead may include expenses such as stationery, utilities, support staff salaries, and or the facilities costs.

What is the formula of manufacturing overhead?

Manufacturing Overhead Formula

To get a percentage, divide by your monthly sales and multiply that number by 100. Here’s the manufacturing overhead equation: Manufacturing Overhead Costs / Number of Sales x 100 = Percentage.

What are the two types of manufacturing overhead?

Manufacturing overhead can be broken into two types: variable and fixed costs.

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