In one sentenceAll factory costs other than direct materials and direct labor, such as factory electricity, machine maintenance, supervisors' salaries and equipment depreciation.
Simply put
A product's cost in a factory has three elements: direct materials, direct labor and manufacturing overhead. Overhead is collected first and then charged to products using an absorption rate.
Administrative and selling expenses (such as head office salaries and marketing) are not included, because they are not production costs.
Worked example
A furniture factory collects its manufacturing overhead for one month.
Factory electricity12,000 SAR
Machine maintenance8,000 SAR
Production supervisor's salary10,000 SAR
Machine depreciation20,000 SAR
Manufacturing overhead = 12,000 + 8,000 + 10,000 + 20,00050,000 SAR
Don't confuse it with
Operating expensesSelling and administrative expenses are charged to the period in the income statement, not to the product's cost.