Manufacturing Overhead Examples

What is the first thing, you want to find something interesting in accounting? Yes, examples are the most interesting way to understand accounting. So, I try to give more and more examples for making accounting interesting. Today, I am explaining some important manufacturing overheads examples and its accounting treatment.

1. Canteen Expenses

For employees welfare a canteen is operated by owner of company. Owner provides the canteen facilities at very subsidized rates. So, this is overhead and we give it standing order no.

2. Stores Overhead

In store overhead, we include rent of store, salary of store staff, insurance etc.

3. Compensation payment to workers

If any compensation is given to workers on his retirement, it will be overhead. We also calculate the compensation payment to workers in case accident which happened in factories. All these compensation will be included in manufacturing overheads.

4. Dearness Allowance

Dearness allowance is given for facing inflation in consumable products. It helps to maintain standard of living in society. Suppose, an employee who is working in a factory has no room for living, then, we give house rent allowance to him. So it will be overhead and calculated on the basis of basic salary.

5. Defective Work

Sometime due to ignorance or machine problem, defective work happens and it is loss of business and includes in manufacturing overhead. If it is abnormal, it will be transferred to costing profit and loss account.

6. Drawing Office and Design Cost

All drawing office and design cost are collected in service cost center and it is calculated and distributed on the basis of design no., labor hour rates. If these designs are made for selling tender, then it will be part of sale overheads.

7. Erection and Dismantling of Plant and Machinery

Erection and dismantling cost are charged for removing machines. All these are manufacturing overheads.

8. Fines Realised from Workers

All fines which are realised from workers are not the income of company. All these incomes will transfer to a special reserve account and will use for welfare of workers.

9. Fire Prevention Costs

Fire prevention costs include the cost of training and cost of workers of such service cost center.

10. Fringe Benefits to Employees

In fringe benefits to employees, we include leave encashment, owner’s contribution in provident fund and other pension schemes, medical fringes etc.

11. Inspection Cost

Inspection cost is paid for quality control of product. This inspection can be done any part of production for identify the defective work.

12. Insurance

Company pays insurance of employees for reducing his payment risk at the time of accident in factory. All these premiums are also manufacturing overheads.

13. Lighting, Heating, Aircontioning, Ventilation Expenses

Lighting, heating, aircontioning and ventilation expenses are distributed on the basis of wattage, floor area, and cubic capacity. If there is separate meter in different department, then no problem of distribution of these manufacturing expenses.

14. Materials Reconditioning Expenses during storage

All these are also manufacturing overheads, if these are related to indirect materials.

15. Power Costs

We include electricity, gas, pressure air and water in power costs and it is manufacturing cost if these are used in factory. These are distributed in different department on the basis of capacity, horse power, watt, machine hour rate etc.

16. Incentive Bonus

It is part of labor cost and this is given to laborers for increasing their efficiency

Accounting treatment of incentive bonus overhead

Incentive bonus to direct laborers will be the part of direct labor cost and adds in it.

Incentive bonus to indirect laborers will be the part of overhead and charged on related department.

17. Bonus Paid Under Payment of Bonus Act

Under payment of bonus act, company is responsible to pay bonus out of profit.

Accounting treatment in cost accounts

Minimum amount of bonus is part of wages and more amount of bonus will be charged on costing profit and loss account.

18. Maintenance and Repairs

Maintenance and repairs are very important need of any manufacturing organization. After using machine and plants at large scale, its importance has increased. Main aim of maintenance and repairs are following:

a) To reduce the loss of wastage due to not working machines and equipments effective way.

b) To reduce the delay time of production.

Accounting treatment of Maintenance and repairs

Department of maintenance can be divided into two parts, one is preventive maintenance and other is corrective maintenance. Standing order numbers are given to each cost center or department. For every department, employees are appointed who are responsible for maintenance and repairs and overhead cost is calculated of these works. We also open repair and maintenance reserve account in which we credit a certain amount and when we spend the amount on maintenance and repair, we debited same amount in this account and balance of this account will be capital and used for future maintenance and repair charges.