What is the manufacturing overhead? How to allocate and account for manufacturing overheads

1. What is the production overhead? What costs are included?

Manufacturing overhead is defined as the fees incurred in the production of products and services of an enterprise, excluding the cost (CP) of direct materials and labor. This cost is incurred at the departments that perform the production activities or the workshops in the factory.

Manufacturing overheads include the following:

• Depreciation expense of fixed assets: This is a type of expense that includes depreciation of all fixed assets in the enterprise such as factories, machinery, equipment,... Depreciation expenses are recorded in the accounts. clause 6274.
• Material cost: This is the cost of materials used in the maintenance and repair of fixed assets at the factory or workshop. Material costs are recorded to account 6272.
• Expenses for services purchased from outside: This is a type of cost used to indicate expenses for external purchases, serving the operation and production of the workshop. These expenses can be electricity, water, internet, subcontractors, etc. These expenses are recorded in account 6277.
• Factory Employee Costs: This is an expense used to pay factory workers who are not the workers directly creating the product. These expenses must include salary, bonus, allowance, insurance,... Expenses for factory employees are recorded to account 6271.
• Production tool cost: This is the cost related to the tools and tools used in the production process at the workshop to create the product. Cost of production tools is recorded to account 6273.
• Other types of costs: These are expenses paid in cash to serve the production process, except for the above.

2. General production cost classification

Manufacturing overhead costs are classified into two main categories, fixed and variable.

Fixed manufacturing overhead

Fixed manufacturing overhead usually does not change with production output. This is an indirect cost that does not directly affect the production process.

Types of fixed production overheads include plant, machinery, equipment,...; Depreciation; management of administrative work at the workshops,... General production costs are allocated to each product unit incurred in the production workshop.

Variable manufacturing overhead

Variable manufacturing overhead varies with output. These are direct costs, which are spent on the departments that directly create products for the business. Variable manufacturing overhead types can be direct materials, direct labor. Variable manufacturing overhead is allocated to the unit of product according to the actual cost incurred.

3. General production cost account

According to accounting principles, manufacturing overhead is recorded to account 627. At the same time, this account also has no ending balance. The debit side of the account includes all manufacturing overheads incurred during production. The credit side of the account includes all kinds of deductible expenses, fixed CPSXC cannot be allocated.

4. How to allocate production overheads

Based on accounting principles, manufacturing overheads are allocated into the following categories:

• Labor cost at the workshop (Account 6271): This cost includes wages, bonuses, payables to employees at the workshop. Account 6271 is recorded as follows: Dr. 627 
• • Dr. 627
  • Account 334

            Other expenses such as social insurance, union fees, etc. will be accounted for:

• • Dr. 627
  • Account 338
• Cost of production tools (Account 6273): In case the tools and tools used for the workshop are of small value, the account will be allocated as follows:
• • Dr. 627
  • Account 153

          For tools that need to allocate a value in manufacturing overhead, this account is allocated:

• • Dr. 627
  • Account 242
• Expenses for services purchased from outside (Account 6227): This expense is allocated as follows:
• • Dr. 627
  • Dr. 133
  • Have account 111, 112, 331
• Borrowing costs payable and breakeven: These costs are allocated according to the rule:
• • Dr. 627
  • Cr 111, 112, 335 (Expenses payable), 242 (Prepaid expenses)
• CPSX transfers the cost of finished products at the end of the period: This cost is allocated to the finished product price according to normal capacity as follows:
• • Dr. 154
  • Account 627
• Expenses deductions: These expenses are allocated to the following accounts:
• • Dr 111, 112, 138
  • Account 627
• Cost of raw materials (account 6272): Cost of raw materials for production in the workshop is allocated as follows:
• • Dr. 627
  • Account 152
• Depreciation of fixed assets (Account 6274): This is the deductible account for fixed assets such as plant, equipment,... in the production process and is allocated as follows:
• • Dr. 627
  • Account 214
• Other cash expenses (Account 6278): These expenses are allocated as follows:
• • Dr. 627
  • Dr. 133
  • Cr 111, 112
• Provision expenses for warranty of construction works: This expense is specifically allocated as follows:
• • Dr. 627
  • Account 352
• Fixed CPSX is not allocated into the production cost of products: These expenses are allocated to the selling price account and clearly recorded as follows:
• • Dr. 632
  • Account 627
• Expenses used for business contracts: This expense is specifically allocated to the following accounts:
• • Dr. 138
  • Account 627
  • Account 3331

5. How to account for general production costs

Accounting for production overheads is an important task of the accounting department in any business. To perform this task, accountants need to clearly identify two different types of overhead costs, fixed and variable.

Fixed manufacturing overhead will be allocated by accounting and processing fees for each unit of finished product. This allocation will be based on the normal production capacity of the machines that produce the product.

If the actual production product is more than the normal capacity, it will be fully accounted into the cost of finished products in the period (accounting to the product cost).

If the normal capacity is higher, the cost will be charged to the finished product according to the normal capacity. In this case, manufacturing overhead will not be charged to cost of goods sold account for the period.

For variable CPSXC, the cost is re-recorded to the processing fee account according to actual production incurred in the period.