Course Outline
Join PRO

Is the rental cost of a building considered overhead?

Author:
Harold Averkamp, CPA, MBA

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).

Join PRO to Track Progress

Features

Free

PRO

Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Dictionary
Bookkeeping Video Training
Financial Statements Video Training
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Flashcards
Crossword Puzzles
Word Scrambles with Coaching
Bookkeeping Study Guide
Managerial and Cost Accounting Study Guide
Certificates of Achievement
Bookkeeping Certificate of Excellence
Business Forms
Printable PDF Files
Progress Tracking
Motivational Badges and Points
Motivational Medal Rankings
Motivational Activity Streaks
Public Profile Page of Achievements

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Read 3,033 Testimonials

PRO for Teams
  • Easily onboard new users and team admins
  • Monitor individual user progress and grades
  • Monitor team progress and compare users
  • View average grades and find problem areas
  • Monitor recent activity and user achievements
PRO for Teams
Take the Tour Join Pro Upgrade to Pro