Manufacturing Overhead

Topics: Cost accounting, Cost, Costs Pages: 3 (905 words) Published: July 25, 2013
Manufacturing Overhead
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Manufacturing Overhead
Manufacturing overhead costs play a vital role in determining final cost of the product. Manufacturing overhead represents all the costs that the company incurs indirectly and not related to the cost of direct labor, direct materials or direct cost of machines (Donald, 2010). In short, companies are not able to trace these costs to individual items during the manufacturing process. Examples of overhead costs include factory supplies, costs emanating from compliance with local, state and federal regulations as well as certain type of equipment and machinery costs (Donald, 2010). Other manufacturing overhead costs include quality assurance costs, property insurance premiums and clean-up costs. Companies may assign to each process a predefined share of manufacturing overhead costs. Companies develop predetermined overhead costs because they do not have the capability to accurate determine the cost of these miscellaneous products. By adding the manufacturing overhead cost to direct labor, companies are able to arrive at the Conversion Cost, which is crucial in informing management on the cost of converting raw materials into the final product that will be destined for the market (Donald, 2010). Furthermore, the Generally Accepted Accounting Principles (GAAP) demands that the company factors in direct materials costs, direct labor as well as factory or manufacturing overhead in determining the cost of goods and in valuing inventory (Donald, 2010). This ensures reflection of the true production costs in the ‘current assets’ and ‘income statements’ portions of the balance sheet. The increase in the overhead rate should not have a negative financial impact on Borealis Manufacturing because after the purchase of the computerized QC system, the company will be able to monitor the quality in the production processes more effectively and accurately, which will...
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