Nonmanufacturing overhead costs are the business expenses that are outside of a company's manufacturing operations. These are often referred to as the selling, general and administrative (SG&A) expenses plus the company's interest expense. Examples of the nonmanufacturing overhead costs include the salaries and other expenses for the following business activities: selling, distribution, marketing, finance, IT, human resources, legal, and so on. (We have additional examples within our AccountingCoach.com topic Nonmanufacturing Overhead.)
Since these costs are outside of the manufacturing function, they are not considered to be costs of the products. As a result, the nonmanufacturing costs are not allocated to the products for determining the costs for inventory or for the cost of goods sold. Instead, the nonmanufacturing costs are immediately expensed in the accounting period in which they are incurred. That is why accountants say that the nonmanufacturing costs are period costs or period expenses. (Only the manufacturing costs of direct materials, direct labor and manufacturing overhead are product costs.)
While the nonmanufacturing overhead costs are not allocated to the products, the company must have its selling prices and sales revenues sufficient to cover both the product costs and the period expenses in order to avoid a negative net income.
