What is a Factory Overhead?

Factory overhead is fundamentally expenses of maintaining a business that can’t be straight forwardly ascribes to an item or administration factory overhead for the most part identifies with industrial facilities or generation of merchandise. 

 

Factory overhead is sometime called indirect cost because they indirectly related to the products that are being produced. They are also called conversion cost because these are costs incurred to convert a raw material into finished goods. They are indirectly related to the company.

Factory overhead is very important for a company to run. Without factory overhead a company cannot run. It is indirect costs that we use on our company. It helps in running a company and takes it to the top and it can also take the company from higher position to the lower. It is the most important costs. Indirect costs are not mostly related to the company. It is somehow related to the company’s production of product. It is the outside costs from the company. The company cannot count those costs in the direct costs because they are not directly related to the company. Factory overhead costs are indirectly related to the company. So factory overhead is a cost that a business has to incur in order to produce its product, but the cost can’t be tracked back to the production of the product.

 

Use of Factory Overhead:

The use of factory overhead is necessary by accounting standards, but it does not bring original value to overhead costs. To minimize the complexity of the factory overhead allocation the best practice is methodology. There ought to be very few total industrial facility overhead records that are polled into the solitary cost pool, and afterward distributed utilizing a straightforward technique. Likewise, the measure of processing plant overhead examination and recordation work can be moderated by charging all insignificant manufacturing plant expense too cost as caused. Factory overhead includes things such as electricity that are us by factory equipment, the depreciation of factory equipment and building, factory personals and factory supplies (other than direct labor).

 

Accounting For Factory Overhead:

Factory overhead expenses can’t be doled out an explicit item or venture, these expenses are dependent on direct work hours or direct work costs. Add up to the expenses of your circuitous materials, backhanded and industrial facility related expenses, and separation the sum either by direct work hours or direct work costs. For instance, on the off chance that you have $100,000 in processing plant overhead expenses and utilized 20,000 direct work hours, partition the $100,000 by 20,000 to get a $5 per-unit portion cost. You at that point add $5 to the expense of every unit delivered.

 

Examples:

Insurance

Rent

Building

Maintenance

Machine maintenance

Property taxes

Factory utilities

Rent on the factory building

Salaries of maintenance personnel

Salaries of quality control staff

Utilities of the factory

Wages of building janitorial staff