Mastering Manufacturing Overhead: Keys to Cost Control and Profitability

Manufacturing overhead, the indirect costs incurred during production, plays a critical role in determining the actual manufactured cost of goods. Accurate pricing is the backbone for manufacturing businesses that helps to ensure competitiveness and profitability.  For manufacturers to maximize their bottom line, they must understand how to calculate and update their overhead.

Manufacturers should review their overhead calculations regularly—at least annually, or for some manufacturers, multiple times throughout the year. Circumstances requiring an additional review can include changes in the operations process or the addition of new technology or equipment.

Overhead calculations are beneficial for many reasons:

• Inventory Valuation: Overhead costs are included in the total cost of goods that are produced. Calculating overhead properly ensures that your inventory valuation is accurate. This affects your bottom line and could have tax consequences if not valued properly. 
  
  
• Cost Control: Overhead calculations help you identify the indirect costs—utilities, property taxes, building rent, equipment depreciation, etc.—associated with your production process. This allows you to control your expenses, which will improve the overall profitability of your business.
  
  
• Pricing Decisions: When you factor in overhead costs, you can set prices to ensure you cover both your direct and indirect costs. This allows you to price your products accordingly and maximize profitability.
  

• Budgeting and Forecasting: For realistic budgets and forecasts, you need accurate overhead calculations.  They help you develop a clear picture of future financial performance and allocate resources.
  

• Profitability Analysis: Overhead calculations help businesses determine which of their processes or products are more cost-effective. This will allow you to identify unprofitable areas and focus more resources on your profitable ones. It will also allow you to adjust less profitable areas and determine if you can make improvements. If the calculations are not done accurately it could lead to reduced profits or losses.
  

• Operational Efficiency: Understanding your overhead costs could reveal inefficiencies in your manufacturing process. It can help you optimize your operations, reduce waste, and improve productivity, which can lead to greater profits.

Overall, overhead calculations are crucial for manufacturers. If you do not have a clear financial picture of your overhead calculation, you will not be able to make well-informed decisions and that could be detrimental to your business.

To discuss your overhead, contact HBK Manufacturing Solutions at 330-758-8613 or manufacturing@hbkcpa.com.