1. Introduction and Objectives
Manufacturing overhead (MOH) consists of all production costs that cannot be directly traced to a specific cost object. Controlling these indirect costs requires a systematic classification structure. This lesson outlines how indirect expenses are categorized, coded, and monitored under US GAAP and IFRS frameworks.
2. Structural Classifications
- Indirect Materials: Materials consumed during production that do not become part of the physical finished product, or whose cost is too small to trace economically.
- Examples: Machine lubricants, cleaning solvents, disposable safety gear, sandpaper.
- Indirect Labor: Wages paid to employees who support the manufacturing environment but do not physically alter raw materials.
- Examples: Factory maintenance crews, plant security guards, supervisors, storekeepers.
- Indirect Expenses: General operational costs required to keep the production facility running.
- Examples: Plant rent, factory building depreciation, equipment insurance, building utilities.
3. Cost Coding Systems
To manage thousands of indirect line items within an ERP system (e.g., SAP or Oracle), companies use structured cost coding matrixes. A common approach is a faceted numeric code:
[2 Digits: Cost Centre] - [3 Digits: Cost Element] - [2 Digits: Behavior]
Ex: 12 (Machining) Ex: 410 (Lubricants) Ex: 01 (Variable)
Using a consistent code architecture allows accounting systems to automatically aggregate overhead costs by department, type of expense, or cost behavior.
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