![]() ![]() Computer and communication systems for the manufacturing function.Electricity, natural gas, water, and sewer for operating the manufacturing facilities and equipment.( Note: For the seven items above, the company will incur costs for salaries, wages, Social Security and Medicare taxes, unemployment compensation tax, worker compensation insurance, health insurance, holiday pay, vacation pay, sick pay, pension or retirement plan, seminars and training, and perhaps more.) People who perform record keeping for the manufacturing processes.People who clean the manufacturing area.People who perform maintenance on the equipment.People who inspect products as they are being produced.People who set up the manufacturing equipment to the required specifications.Material handlers (forklift operators who move materials and units).Some of the costs that would typically be included in manufacturing overhead include: Although the property tax covers an entire year and appears as one large amount on just one tax bill, GAAP requires that a portion of this amount be allocated or assigned to each product manufactured during that year. For example, the property tax on a factory building is part of manufacturing overhead. Manufacturing overhead, however, consists of indirect factory-related costs and as such must be divided up and allocated to each unit produced. On financial statements, each product must include the costs of the following:Īccording to generally accepted accounting principles (GAAP), manufacturing overhead must be included in the cost of Work in Process Inventoryand Finished Goods Inventoryon a manufacturer’s balance sheet, as well as in the Cost of Goods Sold on its income statement.Īs their names indicate, direct material and direct labor costs are directly traceable to the products being manufactured. For a product to be profitable, its selling price must be greater than the sum of the product cost (direct material, direct labor, and manufacturing overhead) plus the nonmanufacturing costs and expenses. (Note that factory administration expenses are considered part of manufacturing overhead.)Īlthough nonmanufacturing costs are not assigned to products for purposes of reporting inventory and the cost of goods sold on a company’s financial statements, they should always be considered as part of the total cost of providing a specific product to a specific customer. Examples include the compensation of nonmanufacturing personnel occupancy expenses for nonmanufacturing facilities (rent, light, heat, property taxes, maintenance, etc.) depreciation of nonmanufacturing equipment expenses for automobiles and trucks used to sell and deliver products and interest expenses. Nonmanufacturing costs include activities associated with the Selling and General Administrative functions. Instead, nonmanufacturing costs are simply reported as expenses on the income statement at the time they are incurred. Since accounting principles do not consider these expenses as product costs, they are not assigned to inventory or to the cost of goods sold. In accounting and financial terminology, the nonmanufacturing costs include Selling, General and Administrative (SG&A)expenses, and Interest Expense. Nonmanufacturing costs (sometimes referred to as “administrative overhead”) represent a manufacturer’s expenses that occur apart from the actual manufacturing function.How these costs are assigned to products has an impact on the measurement of an individual product’s profitability. Manufacturing overhead includes such things as the electricity used to operate the factory equipment, depreciation on the factory equipment and building, factory supplies and factory personnel (other than direct labor). Along with costs such as direct material and direct labor, the cost of manufacturing overhead must be assigned to each unit produced so that Inventoryand Cost of Goods Sold are valued and reported according to generally accepted accounting principles (GAAP). ![]()
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