Overhead expenses are all the costs not directly associated with the manufacturing of a specific product. Raw material costs and direct labor are two examples which do not fall into the category of overhead expenses. These costs are incurred by the manufacturer but cannot identified as part of the direct product costs.
One of the goals in manufacturing or any business is to minimize the direct costs of manufacturing some product. If you are a made to order manufacturer you may find your overhead less then the actual direct manufacturing costs. The reason is your expenses to carry out the daily activities of the company are low compared to the labor and material costs directly associated to the manufacturing of a product. In other companies the overhead may be greater then the actual direct manufacturing costs. For any business the real goal to reach for is lowering your overhead rate while keeping product production at the same level or increased level.
There are three main categories that overhead can be subdivided into. The three would be Selling and administration, distribution and plant factory overhead costs. Each of these cost take away from the companies bottom line.
In the next section we will review each of these overhead categories in detail.
Please see MIE Solutions which offers ERP Software and Cost Estimating software for the manufacturing industry.