Non-Manufacturing Overhead Costs
Non-manufacturing overhead costs, also known as administrative or operating expenses, refer to the costs that are not directly tied to the manufacturing or production process in a business. Unlike manufacturing overheads, which include costs like raw materials, direct labor, and factory overheads, non-manufacturing overhead costs are not associated with the creation or production of goods or services.
Examples of non-manufacturing overhead costs include:
- Marketing and Sales Expenses: These include the costs of advertising, marketing, sales salaries, sales commissions, promotional materials, and more.
- General and Administrative Expenses (G&A): These are the costs related to the overall operations of a company that cannot be directly traced to a product or service. They can include salaries of non-production employees, rent for the office building, utilities for the office, office supplies, legal and consultancy fees, insurance, etc.
- Research and Development (R&D): These are costs incurred for activities intended to improve existing products or procedures, or to develop new products or procedures. It includes salaries of R&D staff, cost of testing materials, prototypes, etc.
These costs are typically classified as expenses in the period they are incurred in the income statement of a company, as they don’t generate future economic benefits or cannot be linked directly to the cost of products or services sold. Hence, they are considered period costs rather than product costs.
Example of Non-Manufacturing Overhead Costs
Let’s consider a hypothetical technology company, TechX.
TechX produces and sells a variety of technological devices. Aside from the costs associated directly with producing these devices (like the cost of materials, labor costs for assembly, costs to run the factory, etc.), they also have a number of non-manufacturing overhead costs.
- Marketing and Sales Expenses: TechX spends $500,000 on a marketing campaign for their new smartphone. This includes TV commercials, online ads, and hiring a marketing agency to run the campaign. They also pay their sales team a total of $200,000 in salaries.
- General and Administrative Expenses (G&A): TechX’s headquarters in a city office costs $300,000 in annual rent. They pay $100,000 for utilities for this office building. They also have an administrative staff that manages the office, human resources, legal, and finance, costing $400,000 in salaries.
- Research and Development (R&D): TechX is also developing a new AI technology that they plan to implement into their future devices. They have a team of engineers and AI specialists working on this project, with salaries totaling $600,000. They also spend $200,000 on testing and other research materials.
All these costs – marketing and sales expenses, G&A, and R&D – are non-manufacturing overhead costs. These costs aren’t directly related to the physical production of their devices but are essential to running the business and its long-term growth. They’re part of the total operating expenses of TechX.