Manufacturing Overhead Costs

Running a business has become more and more challenging these days due to the increased competition and rising start up costs. Raw material costs for factories have shot up and firms with improper management may have a tough time maintaining their profit margins. Overheads are the indirect expenses of factories which need to be considered while managing a factory on a day-to-day basis. The other name given to the manufacturing overhead costs are the factory costs which include the money spent by companies in producing goods in the factories.

Manufacturing Overheads

The manufacturing overhead costs are the expenses incurred on factory activities. In other words, it is also described as a factory burden. The factory overheads will mainly constitute the cost of plants and machinery, cost of fuel, power expenses, salaries paid to the factory workers, expenses on lighting purposes, insurance expenses etc. For the calculation of the factory cost or the money spent on running the factory, what you require is the total of all the factory overheads and the prime cost. The prime cost is nothing but the sum of the materials consumed by the factory, direct wages and the direct expenses made by the factory owner. The formula for prime cost has been given below.

Prime Cost = Materials consumed + direct wages + direct expenses.

Now, let us know the equation that can assist in the computation of the factory cost. It is given by:

Factory Cost = Prime cost + sum of all factory overheads.

Overheads are of two types - fixed overheads and variable overheads. Fixed overhead costs would be the rent payments or the salaries of the workers. The fixed overhead costs are those which do not change with an increase or decrease in the levels of production. The production output or levels of a company strictly depend on the demand for its products on the market. When the demand is more, the factory would be utilizing its full capacity and produce maximum goods. When the demand is less in the market, full capacity would not be used to control costs. Fixed costs are the expenses the factory owner has to bear, irrespective of the profits and production made by the factory. On the other hand, variable costs would be those which rise with the rise in production levels. For example, raw materials costs will rise when the number of goods being produced increase and vice versa.

The manufacturing overhead costs or factory costs can be used further to calculate the cost of production, total cost and total sales generated by the company. When you add the office and administration expenses such as manager's salary, salary of the director, stationery expenses for office, lighting expenses for office to the factory cost, you will be getting the cost of production. Further, by adding the selling and distribution overheads to the cost of production, which mainly consist of the marketing expenses, you will get the total cost for the enterprise. The total sales, finally, would be obtained with the sum of the total cost and the net profit.

Considering the costs is of prime importance while you run your company to check the expenses. Effective cost control strategies will help you grow your business fast.