What are the examples of factory overheads?

It includes factory expenses and maintenance, depreciation of factory plant and machinery and buildings, wages and salaries consumable stores and all forms of an indirect material.

What are the classifications of factory overheads?

By nature, normality, controllability and variability

What are the possible expenditures treated as factory overheads?

These are indirect materials, indirect labor, indirect expenses and other chargeable items.

Factory Overheads | Definition, Examples, & Classifications

Q: What are the main costs of a product?

It consists of direct materials, direct labor, and direct expenses.

Definition of Factory Overheads

Factory overheads are the aggregate of indirect materials, labor, and other costs that cannot be identified conveniently with the articles produced or services rendered.

The benefits arising from these costs cannot be associated with a specific cost unit. Instead, they are apportioned across the cost units on an equitable basis.

Overheads are an element of cost but they are a supplementary cost and cannot be directly added to a particular job.

Explanation

The main cost of a product consists of direct materials, direct labor, and direct expenses.

Besides these expenses, there are certain indirect expenditures that cannot be conveniently identified with the article produced.

These expenditures cannot be allocated to a particular job, process, or item of production. Such expenditures are known as factory overheads.

The factory overhead is the total of all costs (other than direct costs) incurred to maintain and run the production facility or factory.

These are also referred to as production overheads or works overheads.

Examples of Factory Overheads

Examples of items included in factory overheads include:

Factory expenses (e.g., rent, rates, insurance, water, heat, and electricity)

Factory maintenance (e.g., cleaning, servicing, repairs, oiling, and greasing)

Depreciation of factory plant and machinery and buildings

Wages and salaries (other than direct labor) of persons engaged in the factory (e.g., foremen, supervisors, maintenance staff, factory administrative or clerical staff, testers, and examiners)

Consumable stores and all forms of indirect material (i.e., material that cannot be traced as part of the finished product, such as oils and greases, small tools, cleaning materials, and minor spare parts for repairs)

Steps Needed for Proper Accounting of Factory Overheads

Since overheads cannot be allocated to cost units directly, the following steps are necessary for its proper accounting:

Allocation of expenses to production

Allocation of expenses to service departments

Appropriation of expenses to the production unit(s) and service departments that cannot be conveniently allocated

Re-appropriation of expenses related to service departments so as to include them in the production cost

Absorption of expenses of each department over the job, process, or product completed during the period in the department concerned

Problems With Factory Overheads

Several problems associated with factory overheads are stated as follows:

Factory overheads cannot be conveniently allocated to cost units, which gives rise to the apportioning problem

It is not possible to decide whether a cost incurred is beneficial or detrimental

It is not possible to know whether a certain overhead can help in achieving better value for money, which is because the benefits achieved cannot be measured easily

It is not possible to reduce or eliminate such a cost that has been incurred; an extension is undertaken and the step cannot easily be re-traced

Factory overheads have a tendency to grow with increasing business complexity

Expenses Usually Included in Factory Overheads

Wages of indirect workers (e.g., repairmen, labor used on cleaning shop floor, men employed in moving work-in-progress and financial goods)

Salaries and allowances for work manager and supervisory staff

Workers welfare, canteen expenses, medical charges, and compensation

Contribution to social security schemes, educational schemes, and old-age pension contributions

Carriage inward on purchased materials

Indirect materials and materials of small value

Buying and store-keeping expenses

Normal losses of time and materials

Factory rent and rates, property tax, and so on

Power, oil, and gas expenses

Factory lighting

Insurance of factory premises, plant, and machinery

Depreciation

Stationery, telephone, and clerical salaries.

Repair and maintenance expenses

Time-keeping expenses

Factory transport expenses

Expenses of service departments (e.g., boiler room, electricity supply, water supply, inspections, and tool room)

Other miscellaneous expenses related to production shops not listed above

Classification of Factory Overheads

Factory overheads may be classified based on the following:

By Nature

Indirect materials

Indirect labor

Indirect expenses

By Normality

Normal factory overheads

Abnormal factory overheads

By Controllability

Controllable

Uncontrollable

By Variability

Fixed

Variable

Semi-variable

List of Possible Expenditures Treated as Factory Overheads

Under normal circumstances, the following expenditures are included in and treated as factory overheads:

Indirect Materials

Cost of consumable stores

Cost of stationery used in the factory

Indirect Labor

Salary paid to the factory manager

Salary paid to other officers of the company who are involved in some form of manufacturing

Proportionate salary of the director(s) devoting time to factory problems

Holiday pay for workers

Paid sickness leave for workers

Storekeeper salary and salaries of other staff in the stores department

Contribution to provident fund of the factory employees

Contribution to social welfare activities

Expenditures, other than contributions, to social and other welfare activities

Contribution to social security scheme (e.g., premiums for group insurance, state insurance corporation, and so on)

Overtime wages

Wages for normal idle time (if not charged directly)

Indirect Expenses

Rent of factory land and buildings

Insurance of factory buildings, plant and machinery, stock of raw materials, and so on

Municipal taxes and rates

Expenses of canteen, educational facilities, and recreation clubs

Experimental and research expenditure

Design expenditure

Power and fuel

Stores handling expenditure

Factory lighting and heating charges

Carriage inward

Factory telephone expenditures

Other Chargeable Items

Depreciation on plant and machinery

Expenses on removal and erection of machinery

Provision for obsolescence

Cost of defective work

Interest on capital

Development costs

Royalties and patent fees

Maintenance and repairs

Annual bonuses

Benefits (e.g., prizes)

Training expenses

Township maintenance costs

Factory Overheads FAQs

Factory Overheads

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Definition of Factory Overheads