Factory Overhead
Factory
overhead is the costs incurred during the manufacturing process, not including
the costs of direct labor and materials. Factory overhead is normally
aggregated into cost pools and allocated to units produced during the period. The
allocation of factory overhead to units produced is avoided under the direct
costing methodology, but is mandated under absorption costing.
Examples
of factory overhead costs are:
1. Production
supervisor salaries
2. Quality
assurance salaries
3. Materials
management salaries
4. Factory
rent
5. Factory
utilities
6. Factory
building insurance
7. Fringe
benefits
8. Depreciation
9. Equipment
setup costs
10. Equipment
maintenance
11. Factory
supplies
12. Factory
small tools charged to expense
13. Insurance
on production facilities and equipment
14. Property
taxes on production facilities
The
range of possible factory overhead costs can be quite extensive, depending upon
the size and complexity of a factory operation and the level of detail at which
costs are recorded. After factory overhead is allocated to inventory, the
amount actually allocated will vary from the standard amount that had been
budgeted to be allocated.
The
spending variance occurs because the actual amount of factory overhead expenditure
incurred in the period was different from the standard amount that had been
budgeted at some point in the past. The efficiency variance occurs because the
the amount of units to which the factory overhead was allocated varied from the
standard amount of production that had been expected when the allocation rate
was set up.
The
use of factory overhead is mandated by accounting standards, but does not bring
real value to the understanding of overhead costs, so a best practice is to
minimize the complexity of the factory overhead allocation methodology.
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