Manufacturing Overhead (MOH), often abbreviated as Moh, is primarily categorized as an expense account within a company's financial records, specifically in the context of production costs.
Understanding Manufacturing Overhead (MOH)
Manufacturing Overhead encompasses all indirect costs associated with the production process that cannot be directly traced to a specific product. These are essential expenses incurred to run a factory or production facility. While initially recorded, they are later applied to the cost of goods produced, ultimately impacting the Cost of Goods Sold (COGS) when the products are sold.
The Nature of MOH as an Expense
Unlike direct materials or direct labor, which are directly attributable to a product, MOH costs support the overall manufacturing operation. They are considered expenses because they represent the consumption of resources necessary to facilitate production.
Key Characteristics of Manufacturing Overhead:
| Characteristic | Description |
|---|---|
| Type of Cost | Indirect production cost. It's not directly traceable to a specific unit of product. |
| Account Type | Initially accumulated in a control account (often a temporary asset/inventory account during production), but ultimately recognized as an expense through COGS. |
| Components | Includes various costs like factory rent, utilities, depreciation of factory equipment, indirect labor, and factory supplies. |
| Allocation | Must be systematically allocated to products during the manufacturing process. |
For more detailed information, you can refer to resources explaining manufacturing overhead.
How MOH Relates to Cost of Goods Sold (COGS)
Although MOH is an expense, its treatment in accounting follows a specific path in a manufacturing environment:
- Accumulation: Indirect production costs are first accumulated in a Manufacturing Overhead control account.
- Allocation to Inventory: These overhead costs are then allocated to Work-in-Process (WIP) inventory as products move through the production stages. This allocation ensures that the full cost of manufacturing (direct materials + direct labor + manufacturing overhead) is assigned to the products.
- Transfer to Finished Goods: Once products are completed, their total cost, including the allocated MOH, moves from WIP to Finished Goods inventory.
- Expense Recognition: When these finished goods are sold, their accumulated cost (which includes the manufacturing overhead) is expensed as part of the Cost of Goods Sold (COGS) on the income statement. This means that the expense is recognized when the related revenue is earned, adhering to the matching principle.
This process highlights that while MOH represents costs incurred, it becomes an expense that directly impacts a company's bottom line only when the goods it helped produce are sold.
Examples of Manufacturing Overhead
Understanding specific examples helps clarify the nature of MOH:
- Indirect Materials: Adhesives, lubricants for machinery, cleaning supplies for the factory floor.
- Indirect Labor: Wages of factory supervisors, maintenance staff, quality control personnel, and security guards.
- Factory Utilities: Electricity, water, and gas consumed in the production facility.
- Factory Rent or Depreciation: Costs related to the factory building and equipment that are not directly used to produce a specific product.
- Factory Insurance: Insurance premiums for the manufacturing plant and its machinery.
- Property Taxes: Taxes on the factory building.
Properly tracking and allocating these indirect costs is crucial for accurate product costing, pricing decisions, and financial reporting.
