Is the rental cost of a building considered overhead?

Definition of Rent as Overhead

The rental cost of a building used in manufacturing is part of manufacturing overhead. Manufacturing overhead is assigned or allocated to the units produced. As a result, the units produced include part of the rent of the manufacturing building.

The rental cost of a building that is not used for manufacturing (such as the rent of a manufacturer's marketing and administrative offices or the rent of a retail store) is not part of the manufacturing overhead. (It might be referred to as administrative overhead.) This rent does not get assigned or allocated to the units produced. Instead, the entire rent of the nonmanufacturing facilities is immediately expensed in the accounting period when the building is rented.

Example of Rent as Overhead

Assume that a manufacturer rents several buildings at a total cost of $15,000 a month. It has been determined that $10,000 of the rent pertains to the manufacturing facilities. The remaining $5,000 is for rent for housing the nonmanufacturing functions such as selling, general and administration.

The $10,000 of manufacturing rent is part of the manufacturing overhead, which is an indirect product cost that must be assigned to units of product manufactured on a logical basis. As a result, part of the rent is included in the units' costs which are in inventory or have been sold. When a unit of product is sold, the manufacturing rent that is included in the product cost will be part of the cost of goods sold that is reported on the income statement.

The remaining $5,000 of rent for nonmanufacturing functions is expensed each month without being allocated to the units produced. Accountants refer to this rent as a period expense (not a product cost).