If your small business engages in manufacturing, you must learn to monitor and control manufacturing overhead. There are two elements of manufacturing overhead: fixed costs and variable costs. You will find a variety of ways to measure these costs and evaluate their impact on your operation. Familiarize yourself with the most common ways to measure manufacturing overhead.

Direct Labor Costs

Direct labor has been used as a measure of manufacturing overhead since the industrial revolution began. Using this measure, you average the wages of all your production staff, then measure the number of labor hours each unit requires. The average wage times the labor hours equals the direct labor costs. This is a useful figure, especially when evaluating payroll expenses, but it does not include all the costs of manufacturing in a modern production facility.

Machine Hours

Modern manufacturing companies use machinery as a part of the production process, and because laborers operate the machines, it is possible to measure manufacturing overhead costs in machine hours. This figure combines depreciation, maintenance and repair, and labor costs and also compares these costs to the number of units manufactured in a given time period.

Production Departments

Manufacturing is seldom a straight-line process like the old Ford Model T assembly line. Today, manufacturers have departments, such as machining, finishing, quality control and assembling. Many companies find it useful to measure the costs of each department as a better way to get a grasp of where manufacturing overhead is rising. Each department has its own measures, such as labor plus materials, labor plus machine costs and labor plus the cost of defective units. The combined total of all the production department costs is the variable cost of manufacturing in the company.

Fixed Costs

Fixed costs are those expenses that continue no matter how much or how little is produced. These include such things as rent or mortgage, utilities, insurance, building maintenance and depreciation, and property taxes. These costs are part of the overhead for manufacturing and should be part of the calculations when you figure total manufacturing overhead.

Fixed Costs Plus Variable Costs

Your total manufacturing overhead is the total of your fixed costs plus all of your variable costs. Note that because you add in variable costs, your overhead figure will fluctuate to account for increased labor and machine hours. You can average this figure over 12 months to estimate your monthly manufacturing overhead.

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