Factory overhead is a term used in accounting to describe the indirect costs of operating a manufacturing plant or factory. These costs are incurred during the production process but are not directly associated with the production of a specific product. Instead, they are the costs associated with running and maintaining the factory or plant.
There are several types of costs that fall under the umbrella of factory overhead, including:
- Indirect materials: These are materials that are used in the manufacturing process but are not directly included in the product. For example, cleaning supplies, lubricants, and other small tools.
- Indirect labor: This refers to the wages and benefits paid to workers who do not directly work on the production line. This includes maintenance workers, supervisors, and other support staff.
- Factory utilities: These are the costs associated with operating the factory, including electricity, water, gas, and other utilities.
- Depreciation: This is the gradual loss of value of assets over time. In the case of a factory, this includes the depreciation of machinery and equipment used in the manufacturing process.
- Rent and property taxes: The cost of leasing or owning a factory building and the associated property taxes are also included in factory overhead.
All of these costs are essential for running a manufacturing plant or factory, but they cannot be directly attributed to the production of a specific product. As a result, they are considered indirect costs and are included in the factory overhead.
Calculating factory overhead is essential for determining the total cost of producing a product. By including all indirect costs associated with the manufacturing process, a company can accurately determine the total cost of each product and make informed decisions about pricing and profitability.
In summary, factory overhead refers to the indirect costs of running a manufacturing plant or factory. These costs are essential but cannot be directly attributed to a specific product. Understanding and calculating factory overhead is critical for determining the true cost of production and making informed decisions about pricing and profitability.