What is Fixed Manufacturing Overhead Incurred?

Fixed Manufacturing Overhead Incurred

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Fixed Manufacturing Overhead Incurred

Fixed manufacturing overhead incurred refers to the actual amount of fixed overhead costs that a company experiences during a certain period. These are costs that don’t fluctuate with the volume of units produced and are necessary to maintain the manufacturing capabilities of the company.

These costs typically include:

  • Factory Rent or Mortgage: The cost of renting or paying the mortgage on the building where manufacturing takes place.
  • Property Taxes and Insurance: The cost of any taxes or insurance premiums related to the property where manufacturing occurs.
  • Depreciation of Manufacturing Equipment: The reduction in value of the machinery and equipment used in the manufacturing process over time.
  • Salaries of Maintenance Staff: The salaries of employees who perform necessary maintenance on equipment, but who do not directly participate in the production process.
  • Utilities: The cost of utilities necessary for the manufacturing process, such as electricity, water, etc.

Remember, these costs are incurred even if no production takes place, such as during periods of downtime or low demand. In cost accounting, the actual fixed manufacturing overhead incurred is compared to the fixed manufacturing overhead applied to products to determine if overhead has been underapplied or overapplied during a certain period.

Example of Fixed Manufacturing Overhead Incurred

Let’s look at a hypothetical example. Suppose we have a company that manufactures custom bicycles, and here are its fixed manufacturing overhead costs for a specific month:

  • Factory Rent: The company pays $10,000 per month to rent the factory where it makes its bicycles.
  • Property Insurance: The company has an insurance policy that costs $1,000 per month.
  • Depreciation of Manufacturing Equipment: The company owns $300,000 worth of manufacturing equipment, which is expected to last for 10 years with no salvage value. This means the company incurs $2,500 in depreciation expenses each month ($300,000 / (10 * 12)).
  • Salaries of Maintenance Staff: The company employs a maintenance team to keep its manufacturing equipment in good working order. The total cost of these salaries is $7,000 per month.
  • Utilities: The cost of electricity, water, and other utilities for the factory is $2,500 per month.

Adding these costs together, the total fixed manufacturing overhead incurred by the company in this month is $23,000 ($10,000 + $1,000 + $2,500 + $7,000 + $2,500).

This figure represents the actual cost incurred by the company to maintain its manufacturing capabilities during this month, regardless of how many bicycles it produced. In the company’s cost accounting system, this figure would be compared with the fixed manufacturing overhead applied to its products during the month to determine whether overhead was underapplied or overapplied.

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