# How to Calculate Variable Manufacturing Overhead

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Variable manufacturing overhead costs are a set of expenses that fluctuate as production levels change. Businesses calculate and use variable manufacturing overhead to estimate future costs and analyze past performance. If variable manufacturing costs are significantly different than expected, the business will perform variance analysis to identify the underlying cause.

The three primary components of a product cost are direct materials, direct labor and manufacturing overhead. Manufacturing overhead is a catch-all account that includes all manufacturing costs a business incurs other than direct materials and direct labor. Within manufacturing overhead, some costs are fixed -- meaning, they don't tend to change as production increases -- and others are variable. Variable manufacturing overhead costs differ based on how much the company produces. Examples of variable manufacturing overhead include production equipment supplies, replacement machine parts, factory manager production bonuses, and electricity, water and gas bills for the manufacturing facility.

Before production begins, a business will typically calculate a standard or estimated variable manufacturing overhead for the year. Accountants come up with this figure by analyzing historical data and determining how much variable overhead expense the company tends to incur per unit produced. For example, if variable overhead costs are typically \$300 when the company produces 100 units, the standard variable overhead rate is \$3 per unit. The accountant then multiplies the rate by expected production for the period to calculate estimated variable overhead expense. If the business plans to produce 200 units in the next period and the standard rate is \$3 per unit, the estimated variable expense is \$600.