Analysis of Overhead Expenses

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 are not 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 a product. If you are a made-to-order manufacturer, you may find your overhead less then the actual direct manufacturing costs. The reason for this is that the expenses required 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 custom-ordered product.

In other companies, the overhead may be greater then the actual direct manufacturing costs for the opposite reason. For any business, the real goal is lowering your overhead rate while keeping production at the same, or a higher, level.

There are three main categories that overhead can be subdivided into, including:

• Selling and administration,

• distribution,

• and plant factory overhead costs.

Each of these costs take away from the company’s bottom line.

In the next section we will review each of these overhead categories in detail.