Factory Overhead

Factory Overhead Indirect Manufacturing Costs Factory Burden Production Costs Manufacturing Overhead Cost Accounting
Factory overhead, also known as indirect manufacturing costs or factory burden, includes the expenses associated with manufacturing that cannot be directly traced to a specific product. Examples include factory rent, maintenance wages, and general machinery depreciation.
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Definition

Factory overhead includes all the manufacturing costs that cannot be directly attributed to a specific product. These costs are essential for the production process but are not directly tied to the production of individual units. Factory overhead typically includes:

  • Factory rent
  • Maintenance wages
  • Depreciation of general production machinery
  • Utility costs for the production facility
  • Salaries of manufacturing supervisors
  • Indirect materials (e.g., lubricants for machinery)
  • Indirect labor

Examples

  1. Factory Rent: The monthly rental cost of the factory building where production takes place.
  2. Maintenance Wages: Wages paid to workers responsible for machinery upkeep and general maintenance tasks within the production facility.
  3. Depreciation: The allocation of the cost of general production machinery over its useful life.
  4. Utilities Costs: Expenses for electricity, water, and gas used in the factory.

Frequently Asked Questions (FAQs)

What is factory overhead in accounting?

Factory overhead refers to all indirect manufacturing costs that are not directly linked to the production of goods but are necessary for the manufacturing process. These include costs such as factory rent, utilities, and maintenance.

How do you calculate factory overhead?

Factory overhead can be calculated by summing all indirect manufacturing costs. This may include rent, utilities, depreciation, maintenance wages, and other indirect expenses incurred within the factory.

Why is factory overhead important?

Factory overhead is essential for accurately determining the total cost of production. By allocating these overhead costs to products, companies can more accurately set prices and assess product profitability.

Is factory overhead a fixed or variable cost?

Factory overhead can include both fixed costs (e.g., factory rent) and variable costs (e.g., utility costs that fluctuate with production levels).

  • Direct Costs: Costs that can be directly traced to the production of specific goods or services, such as raw materials and direct labor.
  • Indirect Costs: Costs that cannot be directly tied to a specific product, which include factory overhead, administrative expenses, and other operational costs.
  • Cost Allocation: The process of assigning indirect costs to different cost objects, such as departments, products, or projects.
  • Overhead Rate: A rate used to allocate factory overhead costs to products, often determined by dividing total overhead costs by an appropriate allocation base (e.g., direct labor hours, machine hours).

Online References

  1. Investopedia: Manufacturing Overhead
  2. Accounting Tools: Factory Overhead
  3. Corporation Tax Resource on Factory Overhead

Suggested Books for Further Studies

  1. “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
  2. “Managerial Accounting” by Ronald W. Hilton and David E. Platt
  3. “Principles of Cost Accounting” by Edward J. Vanderbeck

Accounting Basics: “Factory Overhead” Fundamentals Quiz

### Which of the following is NOT considered factory overhead? - [ ] Factory rent - [ ] Depreciation of production machinery - [ ] Maintenance wages - [x] Direct labor > **Explanation:** Direct labor is a cost that can be directly attributed to the production of specific goods, whereas factory overhead includes indirect costs like factory rent, machinery depreciation, and maintenance wages. ### What term is also used to refer to factory overhead? - [x] Factory burden - [ ] Direct costs - [ ] Variable costs - [ ] Selling expenses > **Explanation:** Factory overhead is also known as factory burden, encompassing all indirect manufacturing costs. ### Which of these costs would typically be included in factory overhead? - [ ] Raw materials - [x] Factory utilities - [ ] Direct labor - [ ] Sales commissions > **Explanation:** Factory utilities are part of factory overhead as they are necessary for the production process but not directly tied to specific products. ### How is the overhead rate typically calculated? - [ ] Total direct costs divided by total sales - [ ] Total overhead costs divided by total sales - [x] Total overhead costs divided by the allocation base (e.g., direct labor hours or machine hours) - [ ] Total sales divided by total overhead costs > **Explanation:** The overhead rate is calculated by dividing the total overhead costs by an appropriate allocation base such as direct labor hours or machine hours. ### Which of these is a fixed component of factory overhead? - [x] Factory rent - [ ] Raw material costs - [ ] Factory utilities - [ ] Direct labor > **Explanation:** Factory rent is a fixed component of factory overhead, as it remains constant regardless of the level of production. ### Why is factory overhead important for pricing products? - [x] It helps in accurately determining the total cost of production. - [ ] It reduces the need for direct labor. - [ ] It directly increases product sales. - [ ] It does not affect product pricing. > **Explanation:** Factory overhead is crucial for determining the total cost of production, enabling accurate product pricing and profitability assessment. ### Which of the following includes both fixed and variable components? - [x] Factory overhead - [ ] Direct labor - [ ] Raw materials - [ ] Direct costs > **Explanation:** Factory overhead includes both fixed costs (like rent) and variable costs (like utilities that may vary with production levels). ### Which cost is an indirect labor cost included in factory overhead? - [ ] Wages for production line workers - [x] Wages for maintenance staff - [ ] Costs of raw materials - [ ] Advertising costs > **Explanation:** Wages for maintenance staff are indirect labor costs included in factory overhead, as they are not directly tied to specific product production. ### What is the purpose of cost allocation regarding factory overhead? - [ ] To increase direct costs - [ ] To minimize overall production - [x] To assign indirect costs to different cost objects - [ ] To eliminate fixed costs > **Explanation:** Cost allocation involves assigning indirect costs, like factory overhead, to different cost objects (e.g., products, departments) to determine accurate product costs. ### What is not included in indirect manufacturing costs? - [ ] Factory rent - [ ] Depreciation on machinery - [x] Direct materials - [ ] Salaries of supervisors > **Explanation:** Direct materials are directly used in the production of goods, and thus, they are not part of indirect manufacturing costs or factory overhead.

Thank you for exploring the concept of factory overhead and challenging your understanding with our quiz. Continue building your knowledge in cost and managerial accounting!

Tuesday, August 6, 2024
Fail to Deliver
Factory Costs
Indirect Manufacturing Costs January 1, 1
Production Overhead January 1, 1
Absorption Costing - Rate Per Unit January 1, 1
Blanket Rate January 1, 1
Conversion Cost January 1, 1
Cost Accumulation January 1, 1
Direct Expense January 1, 1
Direct Labour Total Cost Variance January 1, 1
Direct Material January 1, 1
Direct Materials January 1, 1

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