In conclusion, manufacturing overhead is something that may hide in electricity meters, internet routers, or even in a supervisor’s salaries. However, it is crucial to track and determine indirect costs, which state whether you are earning or burning money at the production facility. To do so, you now know what are the steps and formulas to measure the manufacturing overhead, right?
1. Smart Pricing
MOH unravels how much is the true cost of every product, allowing you to set the price that covers overall expenses. Without it, you may underprice the product cost, which may lead to financial loss. That’s how MOH will aid you in setting prices that eventually protect your margin.
2. Analyzing Profits
Businesses need MOH to spot hidden costs and identify if products carry a fair share of power, maintenance, and other costs. Considering such things, you can clearly see which SKUs are making money and which are surviving on the overhead. Analyzing it, you can take the required steps to grow profits.
3. Uncover Cost Reduction Areas
MOH precisely breaks down into items that are metered kilowatts, setup hours, and indirect labor minutes, each tagged to a work center. This means businesses can delve deeper and explore the areas where they can reduce unnecessary costs without increasing production volume.
4. Boosting Efficiency
Since MOH plays a role in converting indirect dollars into measurable drivers, it enables your business to level up efficiency in production. It unearths machines or employees’ shifts that burn most indirect time and money to let businesses quickly optimize their production efficiency.
Examples of Manufacturing Overhead Costs
Let’s take a couple of examples to understand how calculating MOH can help you capture those sneaky costs and protect your margins.
Manufacturing Overhead Calculation Example: Fixed Manufacturing Overhead
Suppose your company signs a three-year lease that keeps the 50,000 ft² plant open for $80,000 a year. Insurance on the building and equipment adds another $28,000, and depreciation on the CNC centres, calculated on a straight-line basis, is $92,000. Together, these costs lock in at $200,000 of fixed overhead for the year, regardless of your unit volume.
Manufacturing Overhead Calculation Example: Variable Manufacturing Overhead
To understand this, let us take a small bakery, where the oven uses $0.10 of electricity per loaf. One loaf needs $0.20 parchment sheet, which means $0.30 per loaf. So, when you bake 1,000 loaves of bread, the cost settles for $300, but when you bake 2,000 loaves, it will rise to $600. That’s how variable manufacturing overhead becomes more or less with a tray that slides onto the rack.
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
