Also known as production or factory overhead, manufacturing overhead involves the costs that are incurred as part of the actual manufacturing process. Typically, this form of overhead costs does not include costs such as direct labor or the materials that are actually used in the production process. This means that manufacturing overhead cost is concerned with those expenses that are considered indirect, but still related to production.
There are several examples of necessary expenses that are classified as manufacturing overhead. While direct labor, or the workforce that actually engages in the physical act of production, is not included, other forms of labor are considered part of this type of overhead. Supervisors who oversee specific aspects of the manufacturing process are considered indirect labor, and thus are counted as part of manufacturing overhead. Employees who repair damaged machinery or take care of the building facility in general are also counted as part of factory overhead, since their efforts help to support the direct marketing effort, but are classified as indirect costs.
Depreciation is also part of the calculation of manufacturing overhead. This includes depreciation on the buildings used in the production operation, assuming those buildings are owned by the company. The same is true with the equipment that is used in the production process; as the equipment ages, its worth is depreciated a little each year. The current level of depreciation is accounted for in the financial records of the business as manufacturing or production overhead, thus effectively accounting for this change in value.
There are other expenses that are also routinely counted as manufacturing overhead. Departments that support the production process are listed in this category. This would include any quality control personnel, any department that is involved in assessing and formulating efficiency procedures, printed forms and other supplies that support but are not directly used in the production process, and even rent on a production facility.
Part of the task of the accounting team is to identify what does and does not constitute manufacturing overhead, sometimes in light of applicable governmental regulations. Accountants must also allocate those expenses properly within the financial records, and associate those costs with the units produced as part of the manufacturing process, when and as appropriate. For this reason, the financial department of the business must stay abreast of any changes in government regulations that may influence what can and cannot be identified as manufacturing overhead, and adjust the accounting records to comply with those regulations. This makes the process of calculating taxes owed by the business a much simpler process.