are general and administrative expenses factory overhead

Semi-variable overhead costs: These costs are partially variable and partially fixed. Variable overhead costs: These costs are dependent on the output. Some overhead costs change with the amount of output produced, while others don’t. This creates three types of overhead cost based on behavior:įixed overhead costs: These costs don’t fluctuate based on the manufacturing output. Manufacturing overhead is classified into different parts based on its behavior. Fixed, variable and semi-variable overheads These costs don’t frequently change, and they are allocated across the entire product inventory. They include the property taxes government may charge on your manufacturing unit, audit and legal fees, and insurance policies. Financial costsįinancial overhead consists of purely financial costs that cannot be avoided or canceled. This method is used when there is no particular pattern to the asset’s loss of value. The straight line depreciation method is used to distribute the carrying amount of a fixed asset evenly across its useful life. In the declining balance method, a constant rate of depreciation is applied to the asset’s book value every year. Accountants calculate this cost by either the declining balance method or the straight line method. These costs include the physical items which are essential for manufacturing. They usually include the cost of the property where the manufacturing is taking place and its depreciation, purchasing new machines, repair costs of new machines and other similar costs. Accountants calculate this cost for the whole facility, and allocate it over the entire product inventory. Since their usage isn’t constant, they’re included as variable overhead costs. The might increase or decrease depending on the demand for the product in the market.

Utilities such as natural gas, electricity, and water are overhead costs that fluctuate with the quantity of materials being produced. But the lubricant used to keep the machinery running properly is an indirect cost incurred during the manufacture of paper. Cost accountants spread these costs over the entire inventory, since it is not possible to track the individual indirect material used.įor example, in a paper factory, the wood pulp used isn’t counted as an indirect material as it is primarily used to manufacture paper. Indirect material costs are mostly related to consumables like machine lubricants, light bulbs , and janitorial supplies. This cost is incurred for materials which are used in manufacturing but cannot be assigned to any single product. Cost accountants derive the indirect labor cost through activity-based costing, which involves identifying and assigning costs to overhead activities and then assigning those costs to the product.įor example, in activity based costing, every employee who is working in the manufacturing facility but not directly involved in the manufacturing process, keeps a log on the amount of hours spent on their job and from that the total cost is calculated and then the cost is assigned to each product being manufactured. For example, the salaries for security guards, janitors, machine repairmen, plant managers, supervisors, and quality inspectors are all indirect labor costs. Indirect labor is the cost to the company for employees who aren’t directly involved in the production of the product. Overhead absorption rate is the manufacturing overhead costs per unit of the activity (also called as the cost driver) like labor costs, labor hours and machine hours. Here are the types of costs that are included in manufacturing overhead: Manufacturing overhead costs are called indirect costs because it’s hard to trace them to each product. These costs are applied to the final product based on a pre-determined overhead absorption rate.

What are the different types of indirect costs related to manufacturing overhead?

Usually manufacturing overhead costs include depreciation of equipment, salary and wages paid to factory personnel and electricity used to operate the equipment.Īccording to GAAP (generally accepted accounting principles), manufacturing overhead should be included in the cost of finished goods in inventory and work in progress inventory on a manufacturer’s balance sheet and in the cost of goods income statement. It is added to the cost of the final product along with the direct material and direct labor costs. Manufacturing overhead (MOH) cost is the sum of all the indirect costs which are incurred while manufacturing a product.

Are general and administrative expenses factory overhead