Manufacturing overhead (MOH)

Manufacturing overhead (MOH)
See also
Process costing Manufacturing cost Direct labor Intermediate goods Lot size Marginal cost Factory price Semi-variable cost Real cost

Manufacturing overhead (MOH) is a term used to describe the indirect costs associated with producing a product. These costs include the materials and labor used to produce the product, as well as any additional expenses incurred in the manufacturing process. Examples of these expenses can include:

• Rent or depreciation of the factory or equipment: Rent or depreciation of the factory or equipment are costs associated with the space or equipment used to manufacture a product. This could include rent for a factory, or the depreciation of a piece of equipment over its useful life.
• Utilities: Utilities are the costs associated with keeping a factory running. This can include electricity, water, natural gas, and other utility expenses.
• Manufacturing Supplies: Manufacturing supplies are the materials and components used in the production process. This can include any consumable items used in the assembly process.
• Shipping and Handling: Shipping and handling costs are the expenses associated with transporting a finished product from the factory to the customer. This includes both the cost of boxes and packing materials, as well as the cost of any freight or courier services used to ship the product.

Example of Manufacturing overhead (MOH)

MOH can be calculated by using the formula: MOH = Direct Labor + Direct Materials + Indirect Costs. Direct labor is the cost of the labor used in the manufacturing process, while direct materials are the materials and components used in the production process. Indirect costs are the additional expenses incurred in the manufacturing process, such as rent or depreciation of the factory or equipment, utilities, manufacturing supplies, and shipping and handling expenses.

Formula of Manufacturing overhead (MOH)

Manufacturing overhead (MOH) is calculated using the following formula:

MOH = Direct Labor Cost + Manufacturing Supplies + Rent or Depreciation + Utilities + Shipping and Handling

This formula is used to calculate the total cost associated with producing a product, including the cost of labor, materials, and other expenses.

When to use Manufacturing overhead (MOH)

Manufacturing overhead can be used to track the indirect costs associated with producing a product, such as rent or depreciation of the factory or equipment, utilities, manufacturing supplies, and shipping and handling expenses. These costs can be allocated to the products produced, and can be used to calculate the total cost of production for a given product. Additionally, manufacturing overhead can be used to analyze the efficiency of a production process, as well as to identify any areas where costs can be reduced.

Types of Manufacturing overhead (MOH)

The types of manufacturing overhead costs can be broken down into three main categories:

• Variable: Variable manufacturing overhead costs are those that vary with the production volume. Examples of variable costs can include materials and components used in production, as well as direct labor costs.
• Fixed: Fixed manufacturing overhead costs are those that remain relatively unchanged regardless of the production volume. Examples of fixed costs can include rent and depreciation of the factory or equipment, as well as utilities and insurance.
• Semi-Variable: Semi-variable manufacturing overhead costs are those that have both fixed and variable elements. Examples of semi-variable costs can include shipping and handling costs, as well as the cost of any freight or courier services used to ship the product.

Steps of Manufacturing overhead (MOH)

The steps involved in calculating manufacturing overhead are as follows:

• Calculate Direct Labor: The first step is to calculate the direct labor costs associated with producing a product. This includes any wages or salaries paid to employees who are directly involved in the production process.
• Calculate Direct Materials: The next step is to calculate the cost of any direct materials used in the production process. This includes any raw materials or components used in the manufacturing process.
• Calculate Overhead: The third step is to calculate the overhead costs associated with producing the product. This includes any indirect expenses incurred in the manufacturing process, such as rent, utilities, and shipping and handling expenses.
• Calculate Total Cost: The final step is to calculate the total cost of producing the product. This includes the direct labor and material costs, as well as any overhead costs.

Advantages of Manufacturing overhead (MOH)

Manufacturing overhead offers a variety of advantages to businesses that employ it. These advantages can include:

• Cost Control: By including manufacturing overhead in the cost of production, businesses can better control the cost of their product and ensure that they are charging the appropriate price for it.
• Improved Efficiency: By tracking manufacturing overhead, businesses can better identify areas where they can improve efficiency and reduce costs. This can help them operate more efficiently and save money in the long run.
• Enhanced Quality: By monitoring the costs associated with producing a product, businesses can better ensure that they are producing a high-quality product. This can help them to maintain a competitive edge in the market.

Limitations of Manufacturing overhead (MOH)

Manufacturing overhead can be a costly expense, and there are several potential limitations to consider when budgeting for MOH. These include:

• Variability of costs: MOH costs can vary greatly from month to month, depending on the number of products being produced and the materials and labor needed to do so.
• Inaccurate estimates: It can be difficult to accurately estimate MOH costs in the budgeting process, as they can be unpredictable and can change quickly.
• Unused capacity: If the manufacturing capacity is not being fully utilized, MOH costs can become unnecessarily high.

Other approaches related to Manufacturing overhead (MOH)

Accounting for manufacturing overhead includes both assigning costs to the manufactured product, and allocating costs to the cost of goods sold. This process is commonly done through the use of activity-based costing (ABC) or job order costing. Activity-based costing is a method of assigning overhead costs to activities that are related to the manufacture of a product, such as the setup of a machine or the purchase of materials. Job order costing is a system that allocates costs to individual manufacturing jobs, such as the production of a specific number of units. Both of these methods are used to accurately assign manufacturing overhead costs to the products being manufactured.

In summary, accounting for manufacturing overhead includes assigning costs to manufactured products and allocating costs to the cost of goods sold through the use of activity-based costing and job order costing.

Suggested literature

• Banker, R. D., Potter, G., & Schroeder, R. G. (1995). An empirical analysis of manufacturing overhead cost drivers. Journal of Accounting and Economics, 19(1), 115-137.