Manufacturing Overhead – What Is It and Why Does It Matter?

You may have come across the term overheads on the invoice sent by your supplier enough times to remember that your company need to pay for it.

As an resourceful and effective project manager like you, getting to know each expenditure and then identify ways to reduce the overall costs should be your perpetual goal.

In the case of overheads, what should you know about it? What can you do to reduce it? Read on and find the answers to your questions.

What is overheads?

Overhead or overhead expenses refers to the expenses that are indispensable in business, but can’t generate profits directly. Such costs can’t be traced or identified with particular cost units, unlike that of direct material and direct labor.

For example, factory rent is indispensable in that it allows employees to work in the factory to make products that can generate profits. This is why the rent is part of overheads.

That said, it shouldn’t be hard to understand that your supplier count the overheads in as part of the finished product or component costs. To be more exact, the overheads you see should be manufacturing overheads.

Manufacturing overheads

Manufacturing overheads, also known as indirect costs, production overhead, factory burden, and manufacturing support costs, refer to the in-direct factory-related costs in the process where a product or a component is made. It’s a crucial factor for the supplier to decide how much to charge you.

Examples of manufacturing overheads

Generally speaking, manufacturing overheads include the following items:

  • Salaries for maintenance personnel, manufacturing managers, materials management staff, and quality control staff and even janitorial staff;
  • Depreciation of assets and equipment;
  • Property taxes on production facilities;
  • Rent for a factory building.

Administrative overheads

Different from manufacturing overheads, you don’t usually be charged for the administrative overheads. But you should also know what it includes, so you should see what you can do to reduce the administrative or supporting costs in your organization. This is also a way to earn more for your company.

Examples of administrative overheads

Here are some of the most common items for administrative overheads:

  • Corporate salaries;
  • Outside audit and legal fees;
  • Bad debt;
  • Office supplies;
  • Administration and sales office lease, utilities, travel and entertainment, and telephone fees.

Why manufacturing overheads matter?

Just as the saying goes, know yourself and know your enemy, and you will never be defeated. For you, the project manager, manufacturing overheads breakdown gives you the insight of the component of the price charged by your supplier.

You’ll have more bargaining power when talking to your supplier about reducing the product price, and you’ll have better judgement when receiving different quotes from potential suppliers, because you have the clue of what the manufacturing overheads are mostly made of. Then comes the money: save more for your company and increase the profits.

If you want to develop a good relationship with your supplier, your knowledge and understanding of the manufacturing overheads could be of great use. For example, you can suggest that they find ways to reduce waste and increase manufacturing efficiency, so as to reduce the product price. This is a win-win approach for all parties involved.

Should you have any concerns over manufacturing overheads, or overhead expenses in any other form, feel free to let us know your concern and question. We’d be more than happy to help you out.

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