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    Factory Overhead

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    rahul
    Factory overhead refers to costs incurred during manufacturing that are not direct materials or labor. It includes expenses like supervisor salaries, utilities, depreciation, and maintenance. Factory overhead is pooled and allocated to products based on units produced. The allocation amount may differ from budgets due to variances in spending or production efficiency. While accounting standards mandate overhead allocation, simplifying the process with few aggregated accounts and expensing immaterial costs is considered a best practice.

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    Factory Overhead

    Uploaded by

    rahul
    70 views2 pages
    Factory overhead refers to costs incurred during manufacturing that are not direct materials or labor. It includes expenses like supervisor salaries, utilities, depreciation, and maintenance. Factory overhead is pooled and allocated to products based on units produced. The allocation amount may differ from budgets due to variances in spending or production efficiency. While accounting standards mandate overhead allocation, simplifying the process with few aggregated accounts and expensing immaterial costs is considered a best practice.

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    Factory overhead refers to costs incurred during manufacturing that are not direct materials or labor. It includes expenses like supervisor salaries, utilities, depreciation, and maintenance. Factory overhead is pooled and allocated to products based on units produced. The allocation amount may differ from budgets due to variances in spending or production efficiency. While accounting standards mandate overhead allocation, simplifying the process with few aggregated accounts and expensing immaterial costs is considered a best practice.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    70 views2 pages

    Factory Overhead

    Uploaded by

    rahul
    Factory overhead refers to costs incurred during manufacturing that are not direct materials or labor. It includes expenses like supervisor salaries, utilities, depreciation, and maintenance. Factory overhead is pooled and allocated to products based on units produced. The allocation amount may differ from budgets due to variances in spending or production efficiency. While accounting standards mandate overhead allocation, simplifying the process with few aggregated accounts and expensing immaterial costs is considered a best practice.

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    Factory Overhead

    Definition: 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. It is charged to expense when the
    produced units are later sold as finished goods or written off. The allocation of factory overhead to
    units produced is avoided under the direct costingmethodology, but is mandated under absorption
    costing.
    Examples of factory overhead costs are:

    Production supervisor salaries

    Quality assurance salaries

    Materials management salaries

    Factory rent

    Factory utilities

    Factory building insurance

    Fringe benefits

    Depreciation

    Equipment setup costs

    Equipment maintenance

    Factory supplies

    Factory small tools charged to expense

    Insurance on production facilities and equipment

    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. This difference is caused by either a
    spending variance or an efficiency variance. 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. Ideally, there should be a small number of highly
    aggregated factory overhead accounts that are pooled into a single cost pool, and then allocated
    using a simple methodology. Also, the amount of factory overhead analysis and recordation work
    can be mitigated by charging all immaterial factory costs to expense as incurred.
    Similar Terms
    Factory overhead is also known as manufactu

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