What is the manufacturing overhead? How to allocate general production costs

General production costs is one of the important factors used to measure the actual performance of the business. In the following article, Viindoo will share with readers detailed information about the concept, classification, allocation and accounting of this type of cost. Follow along with us!

What is the production overhead? What costs are included?

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

General production costs include the following types:

• 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.

>>>> More Reference: Production cost

General production cost classification

General production costs classified into two main types, fixed and variable.

Fixed manufacturing overhead

Fixed manufacturing overhead generally do 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 production 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.

General production cost account

According to accounting principles, General production costs are recorded in 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.

How to allocate production overheads

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

• Labor cost at the factory (Has account 6271): This cost includes wages, bonuses, and other payables to employees at the workshop. Account 6271 is recorded as follows: 
• • Account Debt 627
  • Has account 334

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

• • Account Debt 627
  • Has 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:
• • Account Debt 627
  • Has account 153

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

• • Account Debt 627
  • Has account 242
• Expenses for services purchased from outside (Account 6227): This expense is allocated as follows:
• • Account Debt 627
  • Account Debt 133
  • Has account 111, 112, 331
• Borrowing costs payable and breakeven: These costs are allocated according to the rule:
• • Account Debt 627
  • Has account 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:
• • Account Debt 154
  • Has account 627
• Expenses deductions: These expenses are allocated to the following accounts:
• • Account Debt 111, 112, 138
  • Has account 627
• Cost of raw materials (account 6272): Cost of raw materials for production in the workshop is allocated as follows:
• • Account Debt 627
  • Has 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:
• • Account Debt 627
  • Has account 214
• Other cash expenses (Account 6278): These expenses are allocated as follows:
• • Account Debt 627
  • Account Debt 133
  • Has account 111, 112
• Provision expenses for warranty of construction works: This expense is specifically allocated as follows:
• • Account Debt 627
  • Has account 352
• Fixed CPSX is not allocated into production cost of products: These expenses are allocated to selling price account and clearly recorded as follows:
• • Account Debt 632
  • Has account 627
• Expenses used for business contracts: This expense is specifically allocated to the following accounts:
• • Account Debt 138
  • Has account 627
  • Has account 3331

>>>> Read More: What is manufacturing cost

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 manufacturing overhead costs, fixed and variable.

General production costs Fixed costs 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 make the product.

If the actual production is more than the normal capacity, it will be fully accounted into the cost of production 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.

>>>> Useful: How to reduce production costs

How to allocate general production costs in Viindoo Software

Viindoo is a powerful and flexible integrated ERP production management software that offers multiple modules to manage different aspects of the business. In the case of allocating shared production costs, Viindoo provides tools and modules to perform this task.

The relevant module in Viindoo for allocating shared production costs is "Accounting - MRP combined with the MRP Landed Cost Carry Forward module." This module helps track and allocate costs related to shared production to specific produced items within Viindoo.

To use the Accounting - MRP module, you need to install and activate this module in your Viindoo configuration. Once done, you can utilize the following features:

Define allocation methods: Viindoo allows you to define allocation methods for shared production costs, such as allocation based on product quantity, allocation based on market value, allocation based on fixed ratios, and various other methods.

Record shared production costs: When you have shared production costs, you can record them in Viindoo. This may include costs related to labor, materials, machinery, utilities, and other costs associated with the production process.

Landed cost carry forward: With Viindoo software, you can define rules for carrying forward shared production costs related to production. After carrying forward, the system will automatically aggregate the incurred data of shared production cost accounts and perform the carry forward to destination accounts based on the defined rules.

Cost allocation: Based on the defined allocation method, Viindoo automatically allocates shared production costs to specific products. As a result, you can view detailed production cost reports for each product.

View cost reports: Viindoo provides reports related to shared production costs, including summary production cost reports and detailed production cost reports for each product.

FAQs

In the above post, Viindoo has compiled detailed information about General production costs. Hopefully, the above article will be useful and help businesses have a better overview of the costs used in production and business activities. Follow the next articles on our website to know more useful information about running a business!

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