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What happens if you have manufacturing overhead?

figures19082355.jpgEvery company has some type of manufacturing overhead. Unfortunately manufacturing is an expense that can sometimes be hard to control. It is an expense that is a little different to work with as you are unable to charge it to a project or to a product that you sell. Manufacturing overhead allows you to stay in business but they are harder to control as they cannot be directly pinpointed to a single product or service.

Manufacturing overhead is commonly referred to as production overhead, factory burden, or factory overhead. The overhead costs include the costs that are incurred in the factory versus labor and raw good expenses. Here are some of the things that contribute to manufacturing overhead:

  • Depreciation on the land or building

  • Rental expenses

  • Depreciation of equipment

  • Electricity expenses

  • Gas and other utility costs

  • Indirect factory supplies

Since manufacturing overhead is considered an indirect costs, it can be hard to assign overhead costs to each of the products that are produced. You will need to have a strong accounting department to help you with manufacturing overhead expenses in order to come up with a solution that will allow you to afford your business at this location.

Some companies have to consider moving locations to find cheaper rent or utility expenses in order to stay in business. The sting of the economy has taken its toll on a number of businesses and their manufacturing overhead expenses are outlandish and they simply cannot afford to stay in business anymore because of these costs. Moving is one way to reduce your manufacturing overhead but you also need to consider the other additional costs you will encounter just to move your facility.

Your overhead is also related to your nonmanufacturing costs. These costs are commonly called administrative overhead and they deal with the manufacturers expenses you will encounter. Some of the manufacturing costs you will deal with include the following:

  • Selling and general administrative expenses

  • Interest expenses

Nonmanufacturing costs can be applied to the cost of the product and passed onto the customer. When you do this, you raise your prices, which can cause a fallout with your customers. Raising your prices slowly is one way to pay for the nonmanufacturing costs or you also have the option of combining products together into a package deal when you may be able to earn more money per product.

Both of these costs are reported as expenses on your income statement and they can help you secure financing if they start to get out of control and you no longer can afford them. However it is risky to finance nonmanufacturing costs if you do not see an influx in your sales numbers in the future.

Each company has different production methods and what works for one company will not be able to work for another. Your best option is to consider your specific industry and your business in order to pay for manufacturing overhead and to find a way to reduce it or to start selling more products to pay for it.

Having high levels of manufacturing overhead can become a problem for your business as you may be stuck with low salaries and budgets for your staff because you simply have no money left to trickle down to them after you pay for these expenses. This is a common problem for larger firms that are rapidly growing and expanding their business. Make sure you work with your accounting department to come up with a budget for your business that will provide you with a chance to save money and cover these expenses.

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