Manufacturing Overhead
Code: 5143Account Information
| Financial Statement | Income Statement |
| Normal Balance | Debit |
Definition
Indirect costs related to the manufacturing process that cannot be directly traced to a specific product unit, such as factory machinery depreciation, factory rent, factory electricity, machinery maintenance, and production supervisor salaries.
📐 IFRS vs US GAAP Accounting Treatment
IFRS: Manufacturing overhead is recognized as part of inventory cost (WIP and finished goods) when allocated to production.
IFRS: Fixed costs allocated based on normal capacity (ignoring abnormal downtime). Variable costs allocated based on actual usage. GAAP: Same with additional details.
IFRS: Disclose nature of overhead costs, allocation basis, and any abnormal costs excluded. GAAP: Additional disclosures.
Example: Factory rent SAR 100,000 allocated to 10,000 units produced = SAR 10/unit.
GAAP: Overhead recognized as part of inventory cost.
GAAP: Fixed costs allocated on normal capacity, variable on actual usage.
GAAP: Additional disclosures.
Example: Factory rent SAR 100,000 allocated to 10,000 units = SAR 10/unit.
IFRS: Fixed indirect costs are allocated based on normal capacity, and variable costs based on actual usage. GAAP: Same principle, but allowing for LIFO.
❓ Frequently Asked Questions
A: Manufacturing overhead includes all manufacturing costs that cannot be directly traced to a specific product unit. It includes: factory machinery depreciation, factory rent, factory electricity and water, machine maintenance, production supervisor salaries, indirect materials (oils, rags), and factory insurance.
A: Manufacturing overhead is allocated to products using a predetermined overhead rate, calculated by dividing estimated total manufacturing overhead costs by an estimated allocation base (e.g., direct labor hours, machine hours, or direct material cost).
A: Actual manufacturing overhead is what is actually spent during the period. Estimated (standard) overhead is used for planning and control. The difference between actual and estimated (under-applied or over-applied overhead) is adjusted at period end, either charged to cost of goods sold or allocated between inventory and cost of sales.
A: Bases for allocating manufacturing overhead include: (1) direct labor hours, (2) machine hours, (3) direct labor cost, (4) direct material cost, (5) number of units produced, or (6) any other basis that reflects the relationship between overhead cost and production.
A: Manufacturing overhead appears within Cost of Goods Sold (COGS) on the income statement after being allocated to products. On the balance sheet, it appears within inventory values (WIP and Finished Goods) as part of production cost. It does not appear as a separate line item but is merged with other production costs.