Fabricageoverhead

Fabricageoverhead, also referred to as fabrication overhead, is the portion of manufacturing overhead that is tied to the fabrication stage of production. It encompasses indirect costs incurred in converting raw materials into fabricated components, and is distinguished from overhead related to other stages such as assembly, finishing, or packaging. In cost accounting, fabricageoverhead is allocated to produced units based on a chosen activity base, rather than being traced directly to individual units.

Typical components include indirect materials used in fabrication (lubricants, coolants, cleaning supplies), indirect labor in the fabrication department (supervisors, technicians, setup crews), depreciation and maintenance of fabrication equipment (machine tools, presses, welding equipment), utilities consumed by the fabrication area, tooling and consumables, setup and changeover costs, calibration, quality control specific to fabrication, and handling of scrap related to the fabrication process.

Allocation methods: A fabrication overhead rate is often determined before the period, using estimated fabrication overhead and estimated activity (for example, machine hours or direct labor hours). The rate is applied to each job or product. At period end, actual fabrication overhead is compared to applied overhead to determine over- or under-applied overhead, which is then closed to cost of goods sold or adjusted in inventory. More sophisticated approaches use activity-based costing to improve accuracy.

Impact: Understanding fabricageoverhead helps managers price products, evaluate profitability, and identify inefficiencies in the fabrication process. It also informs budgeting and capital investment decisions for fabrication equipment and facilities.