If you're running a manufacturing facility, you need to know exactly what your production actually costs, down to the last dollar. Yet, many organizations struggle to accurately calculate manufacturing overhead, a significant part of their total production expenses.
We'll cover what manufacturing overhead includes and why getting it right can make or break your profitability. You'll also learn practical ways to stay compliant with accounting standards and use maintenance management systems to see exactly where your money goes.
Key takeaways
- Manufacturing overhead includes all indirect costs necessary for production, such as factory rent, utilities, and equipment maintenance, but excludes direct labor and materials.
- Calculating your manufacturing overhead rate is essential for accurate product pricing, determining the true cost of goods sold (COGS), and managing profitability.
- Properly allocating overhead costs to inventory and cost of goods sold is a requirement for compliance with generally accepted accounting principles (GAAP).
- Using a computerized maintenance management system (CMMS) helps you accurately track indirect costs like maintenance labor and spare parts, providing the data needed for precise overhead calculations.
What is manufacturing overhead?
Manufacturing overhead refers to the indirect costs a company or manufacturer incurs during production. We call these overhead costs indirect because they're difficult to trace to each product.
While direct costs come straight from production (think raw materials and labor), indirect costs cover everything that supports production without being part of the actual product (think utilities and facilities). Administrative costs, marketing expenses, and legal fees, while indirect, are not considered manufacturing overhead expenses.
Manufacturers might also refer to manufacturing overhead as “factory overhead” or “manufacturing support costs.”
Examples of manufacturing overhead costs
The following overhead expenses are common for manufacturing facilities:
- Maintenance costs include spending on regular maintenance activities. These include repairs and cleaning/janitorial activities for the manufacturing facility.
- Materials costs refer only to indirect materials in this context. These are materials that manufacturers don't use directly when manufacturing a product. Materials used during regular maintenance activities (such as cleaning materials, lubricants, etc.) fall into this category. Direct materials that change based on production volume (e.g., raw materials) do not count in overhead calculations.
- Property fees include dollars spent on the manufacturing facility, such as rent, mortgage, and property taxes.
- Utilities include the cost of electricity, water, gas, and other utilities that power the manufacturing process.
- Wages and salaries include indirect labor costs for employees not directly involved in the production process. They include facility managers, production managers, janitors, quality control personnel, and so on. Direct labor costs do not factor in here.
Types of manufacturing overhead costs
All manufacturing overhead costs are indirect, but they break down into three types: fixed, variable, and semi-variable.
Fixed overhead costs
These costs stay the same whether you produce 100 units or 10,000.
Examples of fixed overhead costs include rent and property taxes. Whether you produce two items or 200, rent stays the same. Routine maintenance costs also fall under this category.
Variable overhead costs
Unlike fixed overhead costs, variable manufacturing overhead costs depend on the scale of production. Producing more goods means running manufacturing equipment longer, which often means higher utility costs. Electricity, water, and fuel costs all fall in the variable category.
Semi-variable overhead costs
These costs are sometimes fixed and sometimes variable. They remain the same at certain stages but increase based on production output. For example, insurance rates typically include a base rate, with premiums then based on factors like performance.
How to calculate manufacturing overhead
Start by listing every expense, big and small. Then separate your direct and indirect costs. Add up your indirect costs to get your total manufacturing overhead.
Why does manufacturing overhead matter?
Manufacturing overhead plays a huge role in your profitability calculations.
It's easy to make the mistake of focusing only on direct manufacturing costs like direct material costs and labor. So by moving attention to indirect costs, manufacturing overhead helps companies gain a clearer view of how much money they’re spending. This understanding can guide more informed budget decisions and operational scheduling.
Manufacturing overhead and generally accepted accounting principles (GAAP) compliance
GAAP matters because it’s how you make sure your financials reflect the true cost of making your products. Under GAAP, manufacturing overhead is a product cost, so it gets included in inventory on the balance sheet and then flows into COGS on the income statement when the units are sold.
Practically, that means you need to allocate some overhead to every unit you produce. Most companies do this with a predetermined overhead rate using a driver like machine-hours or direct labor-hours, so indirect costs are applied based on production activity.
How maintenance management systems help track manufacturing overhead
To accurately calculate manufacturing overhead, you need reliable data about all your indirect costs. A CMMS provides a platform for your team to easily capture the data you need for precise overhead calculations.
With a computerized maintenance management system, you can:
- Track indirect labor: The system automatically logs time spent by maintenance technicians on repairs and preventive maintenance, giving you exact indirect labor costs.
- Monitor parts and materials: Modern platforms like MaintainX can help you keep detailed spending records on spare parts, lubricants, and other materials used for maintenance activities.
- Record machine hours: Asset tracking features capture machine run times, which gives you a solid allocation base for applying overhead costs.
- Centralize financial data: A CMMS tracks purchase orders and vendor costs in one location, helping you account for all maintenance-related expenses.
When you can track these costs accurately, you can see exactly where your money goes. That clarity helps you make smarter decisions about efficiency improvements.
The final word on manufacturing overhead
Getting manufacturing overhead right can mean the difference between profit and loss in asset-heavy industries. While spreadsheets and manual tracking miss a lot, a CMMS platform can show you what's happening in real time, all in one place.
MaintainX modernizes how you track indirect costs, from maintenance labor to spare parts inventory, helping you make more precise overhead calculations.
Don't let outdated systems limit your ability to understand your actual production costs. Sign up for free and start capturing the right data to drives better financial decisions.
Manufacturing Overhead FAQs
Manufacturing overhead is the indirect cost of running the factory (things like plant utilities, maintenance supplies, equipment depreciation, and production supervisor pay). These costs are treated as product costs (they get included in inventory and flow into COGS when items are sold).
Administrative expenses are costs to run the business outside production, like finance, HR, legal, and marketing.
If the cost supports making the product, it’s generally overhead; if it supports running the company, it’s generally admin.
Most teams use an overhead rate to “spread” indirect costs (like maintenance labor, parts, utilities, and equipment depreciation) across jobs. First, you pick an allocation base that tracks usage, often machine-hours or labor-hours.
Then you calculate a predetermined overhead rate:
Overhead rate = Estimated total manufacturing overhead ÷ Estimated total base (e.g., machine-hours)
Finally, you apply overhead to each job based on what it actually used.
A CMMS helps because it can capture machine runtime and maintenance activity, giving you cleaner data for allocating overhead more consistently.
Maintenance keeps production equipment running, but it doesn’t become part of the product. Repairs, preventive maintenance, and routine supplies (like lubrication) support the manufacturing process as a whole, so they’re indirect expenses. That’s why they’re typically included in manufacturing overhead and then allocated across the products that use the equipment.
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