Nonmanufacturing overhead costs definition

/

What are Nonmanufacturing Overhead Costs?

Nonmanufacturing overhead costs are expenditures not associated with product costs. Since they are not associated with products, these costs are not allocated to products in the determination of the cost of ending inventory or the cost of goods sold. Nonmanufacturing overhead costs include selling, general and administrative costs, as well as financing costs. Nonmanufacturing overhead costs support critical parts of a business, such as its sales and marketing activities, and so should not be considered discretionary costs. Instead, product price points should be set high enough to ensure that a business generates a profit after the full amount of these costs have been incurred.

Related AccountingTools Courses

Bookkeeping Guidebook

Cost Accounting Fundamentals

Examples of Nonmanufacturing Overhead Costs

Examples of nonmanufacturing overhead costs are as follows:

  • Compensation of sales and marketing personnel. This can be a substantial overhead cost, especially when a business has a direct sales model that requires a large sales department.

  • Rent and utility costs on administrative facilities. This cost can be especially large when a business owns its own corporate headquarters building.

  • Interest on loans and lines of credit. The interest on loans may be charged to expense, but may also be incorporated into the constructed cost of fixed assets, depending on the situation.

  • Marketing costs. This cost can be especially large when a business is committed to building the brand recognition of its main products and product lines.

  • Office supplies. This expense typically varies in proportion to the number of administrative staff.

Presentation of Nonmanufacturing Overhead Costs

These costs are reported on a company’s income statement below the cost of goods sold, and are usually charged to expense as incurred. Since nonmanufacturing overhead costs are treated as period costs, they are not allocated to goods produced, as would be the case with factory overhead costs. Since they are not allocated to goods produced, these costs never appear in the cost of inventory on a firm’s balance sheet.