Manufacturing overhead are costs that are not part of labor or material cost and can be either a fixed or variable cost. For instance, fixed overhead costs consist of property taxes, insurance premiums, depreciation and nonmanufacturing employee salaries, according to Accounting Tools. Whereas, variable direct manufacturing overhead costs include indirect labor, indirect material and utilities. Though most of these costs are self-evident, indirect material costs are unique because these costs are not essential to the physical production of the product.
As we indicated earlier, nonmanufacturing costs are also called period costs; that is because they are expensed on the income statement in the time period in which they are incurred. Manufacturing (direct materials, direct labor, factory overhead) and non-manufacturing costs; product and period costs; raw materials, work-in-process and finished goods; cost of goods manufactured and cost of goods sold; cost accounting cycle. Even though nonmanufacturing overhead costs are not product costs according to GAAP, these expenses (along with product costs and profit) must be covered by the selling prices of a company’s products.
Presentation of Manufacturing and Nonmanufacturing Costs in Financial Statements
Rather, nonmanufacturing expenses are reported separately (as SG&A and interest expense) on the income statement during the accounting period in which they are incurred. Although selling costs and general and administrative costs are considered nonmanufacturing costs, managers often want to assign some of these costs to products for decision-making purposes. For example, sales commissions and shipping costs for a specific product could be assigned to the product. However, as we noted earlier, managerial accounting information is tailored to meet the needs of the users and need not follow U.S.
Nonmanufacturing costs consist of selling expenses, including marketing and commission expenses and sales salaries and administration expenses, such as office salaries, depreciation and supplies. The purpose of addressing these costs differently as part of a total manufacturing cost formula is based on the fact that they are accounted for differently when structuring the income statement and balance sheet. However, if management wants to determine the profitability of a specific product or customer, it is necessary to allocate or assign nonmanufacturing costs to the products nonmanufacturing costs include and/or customers outside of the financial statements. In the end, management should know whether each product’s selling price is adequate to cover the product’s manufacturing costs, nonmanufacturing costs, and required profit. Note that all of the items in the list above pertain to the manufacturing function of the business. Since the costs and expenses relating to a company’s administrative, selling, and financing functions are not considered to be part of manufacturing overhead, they are not reported as part of the final product cost on financial statements.
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