Manufacturing overhead
Manufacturing overhead is an accounting category on a company's income statement. It is one of the three main components of cost of goods sold (CGS).
Manufacturing overhead includes all costs necessary for the production of goods, but which cannot be tied to specific goods themselves. This includes such items as indirect labor, indirect materials, property taxes, insurance, and heat and light. As a component of CGS, the higher manufacturing overhead, the lower the gross margin (and income, as well).
Understanding Manufacturing overhead costs is crucial, obviously, in budgeting and planning exercises. However, manufacturing overhead costs (such as indirect labor) can also be important cost categories in:
Financial Reporting (especially the Income Statement)
and
Business Case Analysis (including cost/benefit, financial justification, total cost of ownership, cost/benefit, and return on investment analysis).
Manufacturing Overhead in Financial Reporting
In financial reporting, manufacturing overhead contributes to cost of goods sold (CGS), as shown on the simple income statement, below. Cost of goods sold is subtracted from 
sales revenues to produce the reported gross profit. (Gross margin is the gross profit expressed as a percentage of net sales). Manufacturing overhead, of course, also impacts operating income and net income (profit), as shown.
The income statement shows reported gross profit for the company, but management usually has a high interest in knowing gross profits for individual product lines and individual products, as well. Such information is crucial for effective product management and product strategy decisions, for instance. For product gross profits, actual sales, actual materials costs, and actual direct labor costs can be estimated rather directly. When manufacturing overhead supports multiple products or product lines, however, the overhead costs for specific products may have to be determined by an arbitrarily set allocation percentage.
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Manufacturing Overhead in the Business Case
Manufacturing overhead may be an important cost category in business case analysis, whether the case is a general cost benefit analysis, financial justification, total cost of ownership (TCO), or return on investment (ROI) analysis.
Decisions having to do with asset acquisition or asset life cycle management, for instance, may rely on business case analysis to predict total financial costs and financial gains under different possible actions. Some kinds of production-related assets bring manufacturing overhead costs for operation and maintenance over a long life cycle (e.g., factory machines, vehicles, aircraft, and buildings). Expected manufacturing overhead costs may in fact be the deciding factor in choosing one asset action over another.
Manufacturing overhead costs also belong in business case analysis when the case looks forward to different product sales under different scenarios. Higher sales revenues normally require higher manufacturing costs to produce the additional product units sold. Manufacturing overhead costs should be projected for each business case scenario, in accord with the scenario's projected sales.
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