Which of the following is an example of manufacturing overhead?
Manufacturing overhead – also called indirect costs – are any costs that a factory incurs other than direct materials and direct labor needed to manufacture goods, notes "Accounting 2," a reference guide. In cost accounting, manufacturing overhead is applied to the units produced within a reporting period, according to Accounting Tools, a website that offers professional accounting courses and materials. Show
What Is Manufacturing Overhead?In cost accounting, every unit a factory or company produces has some percentage of manufacturing overhead, costs added to each unit it produces. Accounting Tools gives some examples of manufacturing overhead in cost accounting including:
Although these are some of the most important and prevalent examples of manufacturing overhead, it's important to understand how these examples figure into the total cost of every item a factory or company produces. Essentially, manufacturing overhead includes all of the hard-to-define costs associated with making products, yet they still need to be accounted for when determining the true cost of creating a part or product, hence the term manufacturing overhead, which, by definition, is an indirect cost. Manufacturing Overhead: The Indirect CostsManufacturing overhead includes all of the indirect costs that go into creating any given parts, or even finished products, ranging from widgets to tennis rackets to automobiles. The indirect costs do not include labor and materials, which are considered direct cost_s, and are not accounted for as manufacturing overhead. So, the steel needed to make the widget, as well as the salary of the laborers who are _directly involved in producing that widget, would be a direct cost, and thus not manufacturing overhead. Likewise, the strings, wood, and any other parts needed to produce the tennis racket, as well as the pay for any workers producing any part of the racket, would be direct costs, and again, would not be considered to be part of manufacturing overhead. As Accounting Tools explains:
Companies and their accountants need to be able to determine exactly what are these hard-to-define costs, the manufacturing overhead. If you were to omit manufacturing overhead from the true cost of making every given unit or part, you would not have a true value as to what the part or unit actually costs to produce. Take depreciation, for example, which is perhaps one of the key examples of manufacturing overhead in cost accounting. Investopedia defines depreciation as "the allocation of the cost of an asset over a period of time for accounting and tax purposes." In other words, depreciation is the value that an asset decreases year by year due to factors like wear and tear and obsolescence. Many people know that depreciation is often an important concept in calculating taxes. Companies can often claim a certain amount of depreciation as a deduction when tax times comes around. So, if a machine used in making tennis rackets cost $100,000 initially, it might depreciate $10,000 per year, until its value is zero after 10 years (10 x $10,000). Every part a factory makes causes the machine(s) used to make that unit depreciate little by little, day by day, week by week, and month by month. But, figuring out exactly how much a machine depreciates for every single unit a factory makes is a mind-boggling task for accountants, who must determine how much that depreciation adds to the cost of each unit. Remember, depreciation is only one of the examples of manufacturing overhead associated with the producing of each and every single unit a factory produces. Accounting Coach explains the conundrum for accountants:
Clearly, accountants don't simply guess when determining manufacturing overhead. But they also can't actually figure the true, exact cost of, say, property taxes that must be added to producing every unit or part. To get around this, cost accountants have a method for determining manufacturing overhead. Manufacturing Overhead FormulaIn most cost accounting systems, accountants apply the manufacturing overhead to the goods produced, using a standard overhead rate, says Lumen Learning, a website that offers college-level courses and materials, adding:
Lumen offers this table, which includes many of the examples of manufacturing overhead as noted in the first section above: power (electricity), insurance, property taxes, royalties, and of course, the ever-present manufacturing overhead cost, deprecation: BetaCompany Flexible manufacturing overhead budget Units of output 9,000 10,000 11,000 Variable Overhead: Indirect materials $7,200 $8,000 $8,800 Power 9,000 10,000 11,000 Royalties 1,800 2,000 2,200 Other 18,000 20,000 22,000 Total var. overhead $36,000 $40,000 $44,000 Fixed overhead: Insurance $4,000 $4,000 $4,000 Property taxes 6,000 6,000 6,000 Depreciation 20,000 20,000 20,000 Other 30,000 30,000 30,000 Total fixed overhead $60,000 $60,000 $60,000 Total Overhead (variable + fixed ) $96,000 $100,000 $104,000 Standard overhead rate ($100,000/20,000 hours) $5 This table can be a bit confusing. For example, Beta Company spends between $7,200 and $8,800 for "indirect materials," depending on whether it makes 9,000, 10,000, or 11,000 units. But these are materials that do not directly go into the product; thus, they are indirect costs, which, by definition, are in the category of manufacturing overhead. The same goes for property taxes, depreciation, insurance and so on. Note that some of these indirect costs are fixed costs. The company spends $4,000 for insurance over a given period of time whether it makes 9,000, 10,000, or 11,000 units. Thus, the greater the number of more usable units or products the factory makes in a given time, the lower its per-unit indirect cost for each unit. If you determine the manufacturing overhead – the indirect cost – for each unit, it amounts to $5 for the mid-range (10,000 units; 20,000 direct labor hours; and $100,000 in total cost) that must be added to each unit produced. But if the company can make more units in the same time (same number of hours – the direct labor cost), it will reduce its manufacturing overhead, the cost that must be added to each unit, in this case, to a level below $5. Quick Study's Accounting 2 presents a simpler way to determine manufacturing overhead for a company called A-1 Printers. In this case, Quick Study lists both direct and indirect costs.
In this example, the firm, A-1 Printers, does not break down manufacturing overhead, which it simply calls "overhead," down into individual costs, such as insurance, depreciation, building rent or lease costs, and so on. This is likely an example of a bid for a job, or possibly an explanation to a client of the total cost of the job. In any event, the manufacturing overhead for creating 2,500 calendars is $89.63. Since manufacturing overhead is, technically, applied to each unit, you would divide the total number of calendars by the total indirect costs to find the actual manufacturing overhead (for each unit), as follows:
So:
So, the manufacturing overhead (for each calendar) is 3.6 cents or $.036. Why Manufacturing Overhead MattersOf course, accountants need to determine manufacturing overhead in order to book the real cost of producing each unit. But the real reason for understanding manufacturing overhead is to reduce expenses. Only by knowing which added costs are going into each unit can a company reduce those costs. Monroe, a Minnesota-based manufacturing company that makes and sells a variety of products globally, explains:
Monroe gives the following list – more extensive than the list in the first section – of manufacturing overhead:
Yes, even the cost of accounting, to determine manufacturing overhead among other things, is an example of manufacturing overhead. Monroe notes that business owners can typically reduce their manufacturing overhead costs by performing some simple steps, one of which is to shop around for utilities, which is an example of a large indirect cost. Without shopping around, companies may end up overpaying for monthly utilities, thereby increasing their manufacturing overhead, says Monroe. Shopping around and getting price quotes from multiple service providers, however, can easily save a company hundreds, if not thousands of dollars per year in utility costs, Monroe adds. Manufacturing companies can also reduce their overhead by eliminating waste. Yes, waste is another example of an indirect cost, or manufacturing overhead. Waste is not a direct labor cost, and it is not a cost of direct materials. That is, the materials that go into making a defective or unusable unit or product are indirect materials costs: The units or products that those materials create are discarded, so they are not added to the total of manufactured products. Note that in the list in this section, quality control, which seeks to control waste, among other things, is an example of manufacturing overhead. But a company would not know how much to invest in quality control to reduce waste, until it compares the cost of these two examples of manufacturing overhead: quality control versus waste. Understanding all of the potential examples of manufacturing overhead can help a company understand the true cost of the goods it produces, analyze which of those indirect costs are vital and which can be reduced or eliminated, and, ultimately, can help save money and increase profits in the process. Which of the following is an example of overhead?Overhead expenses include accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities.
Which of the following are are example of overhead overheads?Some examples of overhead costs are:. Utilities.. Insurance.. Office supplies.. Travel.. Advertising expenses.. Accounting and legal expenses.. Salaries and wages.. What are the types of manufacturing overhead?Manufacturing overhead is divided into five distinct groups: indirect labor; indirect materials, supplies, and repair parts; rent and utilities; depreciation; financial costs.
What are three 3 examples of factory overhead?Examples of factory overhead costs are noted below: Production supervisor salaries. Quality assurance salaries. Materials management salaries.
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