A company which is operating a factory has to pay many expenses while raw material and direct labor are classified as direct expenses because they are directly related to production of goods however there are many expenses which cannot be directly attributed to production of goods and they are classified as manufacturing overheads or manufacturing expenses. Let’s look at some of the examples of manufacturing overheads –
- Salary of store manager, supervisors, sweepers, security man salary etc…will be included in manufacturing overhead because these people are not directly associated with production of goods.
- If company has taken factory on rent then rent of factory will also be included in manufacturing overheads.
- Employee’s expenses like company’s contribution to provident fund, gratuity, insurance amount paid for employees and claims arising out of accidents in factory.
- General insurance expenses paid for insurance of factory from earthquake, fire, floods and other such calamities.
- Utility expenses like telephone bill, internet usage expense, electricity expenses, water bills, parking lot expenses for parking of employees vehicles, water filter expenses and so on.
- Depreciation on various assets which are not directly associated with production of goods like depreciation on car, depreciation on factory building, depreciation on computers etc……
- Day to day expenses related to repairs and maintenance of machinery in factory.
As one can see from the above that classifying manufacturing overhead is not that easy because same set of expenses can be direct for one factory and indirect or manufacturing expense for other and that is the reason why before classifying any expense as manufacturing overhead one should look the nature of work and industry in which company is operating.