What are manufacturing overhead costs? How to control overhead costs effectively

General production costs are one of the factors that make up the cost of goods sold. Controlling production costs helps businesses maintain profits, ensuring sustainability in today's competitive business environment. Please read the article below with 1C Vietnam to learn what general production costs are and how to effectively control costs arising in your business.

1. What are manufacturing overhead costs?

Manufacturing overhead is the sum of costs incurred during the production process, excluding direct costs for direct materials and direct labor. These are costs related to asset depreciation, purchased services and other expenses, playing an important role in cost management and evaluating the production efficiency of the enterprise. Types of costs that constitute general production costs include:

• Cost of shared raw materials and production tools: Includes costs related to shared raw materials and materials used in the production process at the workshop.
• Salary costs for factory managers, departments, and teams: Includes salaries, wages, and salary allowances for factory employees, as well as insurance contributions.
• Fixed asset depreciation costs: Includes depreciation costs of fixed assets used in the production process.
• Outsourced service costs: Includes outside purchase costs such as electricity, water, telephone, as well as repair costs for fixed assets.
• Other costs in money: These are other costs to support the workshop's operations, such as reception costs, seminar and conference costs.

2. Classification of manufacturing overhead costs

Manufacturing overhead costs can be classified into two main types: Fixed manufacturing overhead costs and variable manufacturing overhead costs.

• Fixed general production costs: Are indirect costs that do not change with the number of products, including equipment depreciation costs, machinery maintenance, and administrative management costs in workshops. Fixed manufacturing overhead costs are allocated based on the normal capacity of the machinery.

• Variable manufacturing overhead costs: This is an indirect cost and usually changes according to the number of products produced, including indirect labor costs, raw material costs, and indirect materials. Variable manufacturing overhead costs are all allocated to processing costs for each unit of product according to actual costs incurred, depending on the quantity of products produced.

3. Determine account 627 - general production costs

Account 6271 – Workshop staff expenses:

• Take note of salaries and allowances for factory management staff and production departments.
• Includes mid-shift meals for factory managers and production staff.
• Reflects deductions for social insurance, health insurance, community insurance, and unemployment insurance according to the prescribed ratio on salary.

Account 6272 – Material costs:

• Note the cost of materials used in the workshop, including materials for repair and maintenance of fixed assets and tools and equipment managed and used in the workshop.
• Includes temporary camp costs and related expenses.

Account 6273 – Cost of production tools:

• Note costs related to tools and equipment used in workshop management activities.

Account 6274 – Depreciation expenses of fixed assets:

• Reflects depreciation costs of fixed assets used directly for production and fixed assets used for the entire workshop's operations.

Account 6277 – Expenses for services purchased from outside:

• Note the costs of services purchased from outside such as repair, outsourcing, electricity, water, telephone, fixed asset rental, and costs paid to subcontractors in case of construction.

Account 6278 – Other cash expenses:

• Reflects monetary costs in addition to the above types of costs, serving the workshop's operations, including costs for receiving guests, notarization and other costs that may arise.

For example:

Company ABC produces two products, X and Y. Below are the manufacturing overhead costs recorded over a period of time:

- Exporting raw materials to departments including:

The main materials used for the product are 600,000,000 VND, of which: For the production of product

Fuel used for the workshop management department is 5,000,000 VND

- Exporting tools for workshop management is 45,000,000 VND, of which 1-time allocation of tools is 18,000,000 VND, and 1-year allocation of tools is 27,000,000 VND.

- The salary of the workshop management department is 200,000,000 VND

- Deduction for social insurance, health insurance, unemployment insurance, and community insurance is 50,000,000 VND

- Allocation of prepaid costs for renting machinery and production tools: 15,000,000 VND

- Depreciation of tangible fixed assets and production machinery is 25,000,000 VND

- Electricity cost for the factory is 20,000,000 VND, VAT 10%

Know that: Production costs are allocated to the cost of product X and product Y according to the cost of direct raw materials produced.

Answer:

- Exporting main raw materials for production:

Debit Account 621 (X): 250,000,000

Debit Account 621 (Y): 350,000,000

Account 152: 600,000,000

Exporting fuel for production:

Debt 6272: 5,000,000

Yes 1522: 5,000,000

- Exporting tools for production:

Debt 6273: 18,000,000

Debt 242: 27,000,000 (1 year)

There are 153: 45,000,000

Allocation of short-term prepaid expenses:

Debt 6273: 3,000,000

There are 242: 3,000,000

- Salaries payable to factory managers:

Debt 6271: 200,000,000

There are 334: 200,000,000

- Deduction from social insurance, health insurance, unemployment insurance:

Debt 6271: 50,000,000

Debt 334: 50,000,000

There are 338: 100,000,000

- Allocation of prepaid rental costs:

Debt 6277: 15,000,000

There are 242: 15,000,000

- Depreciation of fixed assets:

Debt 6274: 25,000,000

Yes 2141: 25,000,000

- Electricity costs:

Debt 6277: 20,000,000

Debt 1331: 2,000,000

There are 331: 22,000,000

Allocation of general production costs according to main raw material costs:

Total manufacturing overhead costs : 5,000,000 + 18,000,000 + 3,000,000 + 200,000,000 + 50,000,000 + 15,000,000 + 25,000,000 + 20,000,000 = 336,000,000

Product

Product Y = (336,000,000 x 250,000,000) : 600,000,000 = 140,000,000

4. How to control general production costs effectively

To ensure effectiveness in managing overall production costs , thorough and systematic control is an important factor. Here are useful ways to control manufacturing overhead costs :

4.1. Regularly analyze and evaluate production costs

Analysis and evaluation both need to be done on a regular basis with respect to manufacturing overhead costs . Comparing costs between periods can determine whether changes are unusual or not. Important factors to consider include analyzing new costs incurred, examining changes in recurring costs, and evaluating the causes of these changes.

4.2. Increase productivity, reduce labor costs

Increasing labor productivity and reducing labor waste per completed product unit is necessary by conducting research and organizing the construction process scientifically. Reasonable arrangement of work, effective allocation of labor and strict management of labor are important factors that need special attention.

4.3. Apply new technology

Conduct research and apply new technology to consider the possibility of using machines to replace manual labor and automate production processes. At the same time, businesses need to implement technical and technological innovation, bringing progressive achievements in the field of science and technology into the production process in a flexible and timely manner.

4.4. Plan detailed costs

The development of a detailed cost plan needs to be implemented and monitored regularly, with flexible adjustments when abnormalities are detected. Enterprises should strengthen financial inspection and supervision to ensure transparency and efficiency in resource management.

In short, manufacturing overhead costs are a key factor that determines a business's financial performance. Through the article, 1C Vietnam has provided information to help businesses control general production costs effectively. If you have any questions, please contact us immediately for support and advice !