Factory Overhead Expenses
Factory overhead expenses is the type cost which is referred to the “indirect” factory-related costs that are acquired during the manufacturing process of a product or services excluding the cost spent for direct labor and the cost of raw materials.
In business management, this aspect is an important part of accounting principles, start defining factory overhead expenses for your business.
Defining Factory Overhead Expenses and its Significance
In a manufacturing business where a lot of cost is needed to consider, business owners is facing a very challenging task of defining the factory overhead expenses and other types of cost acquired during the manufacturing process of a product. If you know how to define the factory overhead expenses, assessing the inventory and analyzing the cost of goods sold will be easy to deal with.
According to allbusiness.com, factory overhead expenses is also referred in other business terms such as factory burden, overhead cost, indirect cost, indirect manufacturing expense, overhead variance, and manufacturing overhead. It is defined as the “total indirect cost” not including the direct labor and the direct materials. To give you a clear view, if you’re business is in the manufacturing industry wherein you are running production facilities for the making of products, the cost you are spending for the electricity or power to run the factory, it is considered as indirect cost, thus falls under the factory overhead expenses.
It is also very crucial for a manufacturing business to identify thoroughly all the items needed for the whole manufacturing process in order to avoid over expenses that has no return for the business. If every type of cost is allocated accurately, the business itself can have an accurate estimate of the expenses to cover the production process as well as the other business operation without overspending. Further, the biggest downside of overestimating is on the allocation and financial aspect as the business will have hard time in procuring funds because it seems to be too costly.
Items included in Factory Overhead Expenses
Factory or manufacturing overhead covers certain items as part of the indirect costs that the business is spending with for the factory operation particularly on the production process of the products.
Here are the items included in the factory overhead expenses:
- Electricity or gas consumption to power up the production facilities
- Water consumption
- Rent on the factory building
- Depreciation of factory equipments
- Indirect factory supplies
- Indirect factory personnel such as factory supervisors
- Indirect maintenance employees
- Maintenance of the factory machines such as oil and lubrication needs
- Quality control or assurance cost
- Factory insurance premiums
- Clean-up cost
- Government contracts
- Labor charges
- Factory workers’ compensation insurance
- Insurance on raw materials
- Payroll taxes
The above listed are examples of indirect cost as part of the manufacturing or factory overhead expenses. These costs should be assigned properly on the products in order to identify its true value or profitability.