If you work in the manufacturing industry, either as an employee, independent contractor or business owner, you’ve probably heard of the term “overhead” at some point in time. By calculating manufacturing overhead, you’ll have an easier time reducing unnecessary expenses while growing your company’s net revenue in the process. But what exactly is manufacturing overhead?
Manufacturing Overhead: the Basics
Manufacturing overhead is used to describe the total costs of a manufacturing company’s normal business operations. The truth is that all businesses have some type of overhead, and manufacturing companies are no exception. Manufacturing overhead, also known as factory overhead or production overhead, consists of all expenses related to the company’s operation, with the exception of direct materials and labor/payroll.
Because manufacturing overhead does not include direct materials or labor, it’s often referred to as an indirect cost. Direct costs are typically the materials and labor, simply because they are the most critical expenses of operating a manufacturing company. But there are other costs associated with manufacturing, and these “indirect” costs consists of manufacturing overhead.
Some common examples of manufacturing overhead include the following:
- Electricity
- Water
- Gas
- Telephone
- Cleaning
- Material handling equipment (e.g. forklifts)
- Equipment maintenance, service and repairs
- Insurance
- Legal fees and expertise
- Personal protection equipment (PPE) for workers
- Quality control programs
- Accounting
- Building rent/lease
- Janitorial staff wages
- Maintenance personnel wages
- And much, much more…
How to Reduce Manufacturing Overhead
Now that you know a little bit about manufacturing overhead, you might be wondering how to reduce these costs. Well, the good news is that business owners can typically reduce the costs by performing some simple steps, one of which is to shop around for utilities. When was the last time that you checked prices for utilities like electricity, gas and water in your area? Most manufacturers rarely, if ever, do so. Therefore, they end up overpaying for monthly utilities, increasing their total overhead. Shopping around and getting price quotes from multiple service providers, however, can easily save you hundreds if not thousands of dollars per year in utility costs.
Manufacturing companies can also reduce their overhead by eliminating waste. Even if you run a relatively waste-free business, there’s always room for improvement. Consider recycling and reusing metals and other materials instead of throwing them away.
Hopefully, this will give you a better understanding of manufacturing overhead and how it works. Manufacturing overhead is the total cost of all indirect expenses associated with manufacturing.