Total Manufacturing Overhead Cost Formula: Separating Factory Overhead from Non-Manufacturing SG&A

Total manufacturing overhead = indirect materials + indirect labor + other manufacturing overhead.

Manufacturing overhead excludes direct materials and direct labor.

Factory overhead is needed to produce a product but cannot be directly traced to an individual product.

Use this guide to sort factory overhead from selling and administrative expenses, then move from the cost pool to the allocation question. Explore the wider production economics collection.

What belongs in the total manufacturing overhead cost formula?

Indirect materials include goods not directly traced to the finished product.

Work tied to the factory but not to the product is indirect labor.

For the total indirect manufacturing cost formula, use the component sum above. Build your worksheet around these categories:

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Cost-pool category	Classification example
Indirect labor	Factory floor supervisors are an example of indirect labor.
Indirect labor	Factory housekeeping staff are an example of indirect labor.
Other manufacturing overhead	Production facility electricity is an overhead example.
Other manufacturing overhead	Factory depreciation is an example of manufacturing overhead.
Other manufacturing overhead	Factory insurance is an example of manufacturing overhead.
Other manufacturing overhead	Factory property taxes are an example of factory overhead.

Overhead lighting and enclosed machinery on a factory floor — Production facility electricity is an overhead example.

Where should maintenance labor go?

Factory maintenance workers are an example of indirect labor.

Factory maintenance is an example of manufacturing overhead.

Enter maintenance workers’ pay under indirect labor. When preparing the other-overhead subtotal, check the maintenance account for the same payroll entry before adding it. Keep the worksheet categories mutually exclusive.

Worker examining a metal part beside a workshop tool trolley — Work tied to the factory but not to the product is indirect labor.

What is the difference between manufacturing and non-manufacturing cost?

Manufacturing product cost includes direct materials, direct labor, and manufacturing overhead.

Nonmanufacturing period-cost examples include accounting, sales, and office-building utilities.

Use the function of the expense as your classification question:

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Review question	Treatment
Work tied directly to a product?	Work directly tied to the product is direct labor.
Work tied to the factory?	Work tied to the factory but not to the product is indirect labor.
Work tied to marketing?	Marketing-department labor is a sales and administrative expense excluded from product cost.
Electricity for administrative premises?	Administrative facility electricity is excluded from manufacturing overhead.

Non-manufacturing overhead examples

Nonmanufacturing period-cost examples include accounting, sales, and office-building utilities.

Period costs are expensed in the period in which they occur.

Period expenses follow accrual recognition regardless of when cash changes hands.

Office desks, monitors and ceiling lights beside large windows — Administrative facility electricity is excluded from manufacturing overhead.

Shared administrative and production buildings require allocation between production and period costs.

Before summing the factory pool, mark the shared account and record the allocation basis alongside it.

Does every administration cost belong outside production?

Factory management and administration can be included in fixed production overhead.

Administrative overhead that does not bring inventory to its present location and condition is excluded from inventory cost and expensed.

For inventory classification, apply the Australian Accounting Standards Board inventory treatment discussed below.

How should research and development be handled?

In the IFRS Foundation’s intangible-assets treatment:

Research expenditure is recognised as an expense.

Development expenditure meeting specified criteria is recognised as an intangible asset cost.

Keep separate research and development lines in the classification review.

Where do manufacturing costs go after classification?

Direct materials, direct labor, and manufacturing overhead enter work in process inventory.

Completed products’ costs transfer to finished goods inventory.

For companies using inventory accounts, product costs are expensed when inventory is sold.

Period costs are expensed in the period in which they occur.

How does this connect to cost of goods manufactured?

Cost of goods manufactured is the cost of units completed and transferred to finished goods during an accounting period.

Cost of goods manufactured equals beginning work in process plus current manufacturing costs minus ending work in process.

Continue with the cost of goods manufactured and work-in-process reconciliation.

Total overhead versus the predetermined overhead rate

Predetermined overhead rate equals estimated overhead cost divided by expected activity.

Common traditional overhead drivers include direct labor dollars, direct labor hours, and machine hours.

Actual overhead incurred rarely equals the amount applied to individual jobs.

Use the manufacturing overhead allocation analysis for the next allocation step.

Inventory allocation: capacity and exclusions

The following inventory treatment follows the Australian Accounting Standards Board’s inventory framework.

Conversion costs include systematic allocation of fixed and variable production overheads incurred in conversion.

Fixed production overhead is allocated based on normal production capacity.

Actual production may be used if it approximates normal capacity.

Low production or idle plant does not increase fixed overhead allocated to each unit.

Unallocated overhead is expensed in the period incurred.

Variable production overhead is allocated based on actual use of production facilities.

Which costs are excluded from inventory?

Selling costs are excluded from inventory cost and expensed in the period incurred.

Abnormal wasted materials, labor, or other production costs are excluded from inventory cost and expensed.

Storage costs are excluded from inventory cost unless necessary in the production process before a further production stage.

Before you total the worksheet

Separate direct materials and direct labor from the overhead entries.
Identify the factory function behind each indirect-cost entry.
Split shared production and administrative accounts using the recorded allocation basis.
Check maintenance payroll for duplicate inclusion.
Review inventory exclusions before moving to the allocation calculation.

Return to production economics for related cost analyses.

Sources

OpenStax — Components of product costs
OpenStax — Cost behavior patterns
OpenStax — Flow of product costs
OpenStax — Predetermined overhead rate
OpenStax — Underapplied and overapplied overhead
Penn State — Product and Period Costs
Australian Accounting Standards Board — Inventories
IFRS Foundation — Intangible Assets overview