Manufacturing overhead

Manufacturing overhead covers every production cost that is not direct materials or direct labour, including factory rent, equipment depreciation, supervisor salaries, and indirect materials.

Also known asMOH · factory overhead

ByHoang TruongUpdated June 30, 2026

See it move

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The infographic is a three-step flow showing how manufacturing overhead is collected and assigned to product units. First, factory costs — rent, equipment depreciation, supervisor wages, and indirect materials — are gathered into a cost pool; that pool is divided by budgeted activity to produce a predetermined overhead rate of €12 per machine hour (€120,000 ÷ 10,000 hours); each job then absorbs overhead at that rate, so a job consuming three machine hours carries €36 of overhead. The two connector labels between steps identify the arithmetic: dividing by the budgeted activity base, then multiplying by the driver units the job actually uses.

Where it fits

TopicCost Terms & ClassificationCoreSubjectCost AccountingCore

The formula

LaTeX

\text{POHR} = \frac{\text{Budgeted MOH}}{\text{Budgeted activity}}

Variables

$P O H R$: Predetermined overhead rate (€ per unit of activity)
$B u d g e t e d M O H$: Estimated total manufacturing overhead for the period (€)
$B u d g e t e d a c t i v i t y$: Estimated total units of the chosen cost driver (e.g. machine-hours) (hours / units)

Set before the period begins using budgeted, not actual, figures.

LaTeX

\text{Applied OH} = \text{POHR} \times \text{Actual activity}

Variables

$P O H R$: Predetermined overhead rate (€ per unit of activity)
$A c t u a l a c t i v i t y$: Cost-driver units actually consumed by the job or in the period (hours / units)

The difference between applied and actual overhead is the over- or under-applied overhead cleared at period end.

Check yourself

PracticeCORE

A furniture factory incurs the following costs: timber €80,000; assembly-line wages paid by the hour €45,000; factory manager's salary €35,000; wood stain and sandpaper used across all products €6,000; machine depreciation €22,000. Which items are classified as manufacturing overhead?

Select an answer to check your understanding.

If you trained under a national GAAP

DE · HGBWhere national-GAAP intuition diverges from the international standard

HGB (German)

HGB distinguishes between overhead costs that must be included in inventory cost (direct production overhead, depreciation on production machinery) and those that may optionally be included (general administrative overhead, voluntary social expenditure, and in certain circumstances interest on debt financing the production process). This optionality means two otherwise identical German manufacturers can report materially different inventory values depending on the accounting policy choices made.

IFRS

IAS 2 requires that the cost of inventories include all costs of conversion — both variable and systematically allocated fixed production overhead — leaving little room for the optionality found in HGB. General and administrative overhead unrelated to production is excluded, and borrowing costs are excluded from inventory cost for most items because inventory is typically a short-cycle asset that does not meet the threshold for cost capitalisation.