How to calculate manufacturing overhead

You add all of your manufacturing costs up or multiply the overhead cost per unit by the number of units your business manufactures.

When you use this calculation and determine that your manufacturing overhead rate is low, this means that your business is operating effectively. The higher percentage indicates that your business production process is lagging.

This calculation not only helps you run your business more efficiently and effectively but also is very important in terms of drawing up a budget. Knowing the amount of funds you need to have for your manufacturing overhead helps you develop a more accurate budget for your business.

Here are some of the costs that should be factored into your overhead manufacturing budget:

• Indirect labor. These costs are associated with employees of the company that don't directly participate in the manufacturing of one of your products. This can include personnel like janitors, security guards, machine technicians, plant managers, supervisors, and quality control inspectors.

  All of these employees' salaries are part of your indirect labor costs. You should track the time and pay of these employees.

• Indirect materials. These costs refer to materials used in manufacturing but are not designated to a specific product. These are mostly going to apply to consumable materials, like lubricants for your machines, light bulbs, and cleaning supplies.

  These costs should be spread out over your entire inventory since they are too difficult to keep track of their use.

• Utilities. Utility costs can be difficult to calculate because they often fluctuate due to a number of manufacturing factors. This means that water, electricity, and gas are overhead costs, but they do not count as a constant.

  There are times when you will need more use of them, and times you will need less use of them, depending on the consumer demand for your specific product or products.

  Because this is the case, you can recognize these are variable overhead costs. They should be calculated for your whole manufacturing plant and any sub-buildings, and then dispersed over your entire product inventory.

• Physical costs. These costs are determined by the straight-line method or the declining balance method. The straight-line method disperses the load amount of fixed assets equally across their use-life. The declining balance method uses a constant rate of lowering applied to the assets' overall book value each year.

• Financial costs. These are money-related overhead costs that can not be canceled or avoided. These include items like property taxes that the government charges on your manufacturing plant, insurance policies, and any legal fees you might accrue.

  For the most part, these financial costs are constant and won't change, so you can allocate them across your entire product inventory.