To calculate manufacturing overhead, you add up all indirect costs that are related to operating your factory, then divide the sum and allocate it to every unit that you produce. This formula is useful to businesses that do not have a significant financial security, and wish to reduce costs.
One example of this is the amount of property tax that you have to pay for a factory building that you own. The property tax is good for a whole year and is represented by one lump amount on one statement, but GAAP mandates that you assign the proper portion of that tax to each product you make over the course of that year. Other costs that are indirect but still related to running a factory, some examples are: product inspectors who look at items when they come off the line; people who clean up the manufacturing section; people who keep records about the process of manufacturing; people who manage the factory; people who maintain equipment; people who ensure that the equipment is set to the proper specifications; and materials handlers such as forklift operators. Salaries, taxes, wages, unemployment compensation tax, worker's compensation coverage, holiday and vacation pay, health insurance, retirement plan or pension and training are some expenses that apply to these workers, and they all count as part of manufacturing overhead.