Factory overhead is the costs incurred during the manufacturing process, not including the costs of direct labor, direct materials and direct expenses. Costs that cannot practically be assigned directly to the production or sale of a particular product. In accounting terms, such costs are not directly identifiable with a specific cost objective.:
- Costs of minor amount may be treated as indirect costs
- Overheads are to be classified on the basis of functions to which overheads are related
- Production overheads
- Administrative overheads
- Selling overheads
- Distribution overheads
Overheads may also be classified on the basis of behavior such as variable overheads, semi-variable overheads and fixed overheads. Overheads comprise of indirect materials, indirect employee costs and indirect expenses which are not direct expenses which are not directly identifiable or allocable to a cost object in a economically feasible way. Manufacturing overhead consists of three primary costs: indirect materials, indirect labor, and indirect expenses.
Indirect materials include factory supplies such as sandpaper to smooth rough edges, blades to cut materials, oil for the production machines & lubricants and other factory-related materials and supplies that do not directly become part of a product. Indirect material costs differ from direct materials in that indirect costs are not traceable to a particular product.
Indirect labor includes factory supervisor salaries, factory maintenance workers salaries or wages, production supervisor salaries, quality assurance salaries, materials management salaries, employee benefits, materials handling, overtime premium, plant security, Workers’ Compensation Insurance and other costs for factory-related workers who do not directly contribute to producing a particular product. Indirect labor costs differ from direct labor in that indirect costs are not traceable to a particular product.
Some examples are factory rent, factory insurance, factory building and equipment depreciation, factory utilities, Equipment setup costs, factory small tools and factory, defective work, fuel, heat and light, power, property tax, Telephone/Fax, Water and equipment maintenance.