What is Fixed Manufacturing Overhead?
Fixed manufacturing overhead is the production cost that stays the same regardless of how many units are made — factory rent, supervisor salaries, machine depreciation, insurance on the plant. Under absorption costing (required by IFRS), it is allocated to each unit; under variable costing, it goes straight to the period’s P&L.
How It Works
- Examples: factory rent, plant depreciation, supervisors, security, property insurance
- Allocated to inventory using an overhead absorption rate based on practical capacity
- Unabsorbed amounts go to cost of goods sold (under IFRS) when capacity is idle
- Distinguished from variable overhead (utilities, indirect materials) that move with output
- Critical for product pricing, transfer pricing, and segment profitability
Saudi Context
Saudi industrial companies follow IFRS, so fixed manufacturing overhead must be absorbed into inventory based on normal (practical) capacity. SOCPA-aligned cost accounting requires unabsorbed fixed overhead to be expensed in the period, not parked in inventory.
Example
A Saudi cement plant has fixed manufacturing overhead of SAR 60M/year, practical capacity of 1.2M tons, so the absorption rate is SAR 50/ton. Each ton of cement produced carries SAR 50 of fixed overhead in its inventory cost.