How do I spread factory overheads like rent, water and supervision over my products?

2026-11-06 | Intagya ERP

At the end of the month the factory owner pays the rent, the water bill, the shift supervisor and the night guard. The accountant posts all of it as general expenses. The same day the sales manager asks what one unit of square tube costs, and gets a figure with steel and the operator's wage in it, and nothing else.

Those two numbers never meet. That gap is where a lot of factories lose their profit.

What are factory overheads, and why do they fall out of the cost?

They are everything the whole factory spends that belongs to no single line: building rent, water, administration and supervision salaries, general maintenance, the storekeeper. They fall out because they are posted to general accounts and nobody ties them to production. The product looks cheaper than it is, and gets priced that way.

My view: ignoring them is worse than spreading them imperfectly. Any sensible split is closer to the truth than zero.

Should I spread overheads by units made or by hours?

By hours actually worked, in most factories. A line that ran 200 hours this month used the building and the supervisors more than a machine that ran 60. Spreading by units punishes the small product made quickly and flatters the one that takes a long time.

A made-up example from sample data: factory overheads of 146,000 in a month and 706 hours worked across all lines, so about 207 per hour. The rolling line ran 206.8 hours, so its share is about 42,759. Quality and packing ran 60.6 hours, so its share is about 12,523.

How do I tell Intagya ERP which accounts are factory overheads?

Once. The chart of accounts has a Factory overheads column; switch it on for factory rent, water, administration and supervision salaries and general maintenance. From then on the system adds up what was posted to them each month, straight from the journal entries, with no side spreadsheet for anyone to keep up.

Whatever is posted on one line's cost centre is not spread a second time. The furnace's own meter bill goes to the furnace, and what is left on the account is shared by everyone.

Then, in the manufacturing settings, pick the Factory departments, such as supervision and stores. People in those departments who do not stand on one line count as factory overheads. Line workers' salaries go straight to their own line.

Every line or machine has a cost centre the system creates for it. When you post a bill that belongs to one line, pick that cost centre, so the whole amount goes there instead of being spread over everyone.

What do I do before the month's bills arrive?

Use an estimate, then correct it. An order finishes on the 10th; the water bill arrives on the 5th of next month. You cannot wait for every bill to know a cost.

So before the close the system uses an estimated rate: from the last closed month, with the overhead share averaged over the last three closed months. In Order costs, an Estimate column is ticked on every order whose overheads are still estimated, so nobody mixes the two.

What happens when I close the month?

The estimate is replaced by the actual figure on every order of that month. Once the bills are posted, the manufacturing manager or the accountant opens the month in Factory overheads and presses Close the month. The system adds up the overheads and the hours worked, and works out for each line its hours, salaries, depreciation, running costs, overhead share and hour rate.

The accountant has a Factory overheads close shortcut in the Accounting menu, so there is no need to hunt through Manufacturing. If a late bill turns up after the close, an accounting manager reopens the month and it is closed again.

Is this worth it for a small factory?

Yes, maybe more than for a big one. With one or two lines, rent is a large part of the cost, and leaving it out changes the whole price. Mark your accounts once and record working time on manufacturing orders, because the split follows the hours.

The share does not sit on its own. It goes into each line's hour rate along with salaries, depreciation and power, and then into the profit of each product.

How do I work out a machine's hour rate from salaries, depreciation and power?

This week, open the chart of accounts and mark the factory accounts, then pick the factory departments in the settings. At the start of next month, close last month and compare the new hour rate with the figure you used to type by hand. The steps, with pictures, are in the user guide.

Real production cost, step by step