Factory Overhead Costs Definition And Its Types

What are Factory Overhead Costs and Types of Factory Overhead Costs (BOP) – Manufacturing Overhead Costs are all costs incurred during the production process except raw material costs and direct labor costs.

The Factory Overhead Costs are used to state some of the indirect costs associated with manufacturing products, namely supporting costs incurred in manufacturing the product. These costs will be part of the product and are allocated to the product in various ways. In the concept of Accounting, Factory Overhead Costs are often regarded as indirect factory costs.

Overhead costs are basically expenses or costs that are not easy to trace and difficult to identify with certain unit costs so that they cannot be directly related to the products and services produced by the company.

However, overhead expenditure is very important for production and business operations because it provides important support for production activities and business operations in generating company profits. It can be said that without this overhead expenditure, production will be very difficult or even impossible to carry out its activities.

For example, to produce a product certainly requires buildings and electricity and other utilities in order to carry out its production activities, the building and electricity rental costs are incurred for general corporate operational purposes and not for orders or only for certain products.

The company must pay overhead costs on an ongoing basis, regardless of whether the company produces products in large quantities (large volumes) or small (small volumes). For example, a company still has to pay a building rental fee of $ 500.000 even though the number of units it produces is only 1000 units (small volume) or in large quantities of 1,099,000 units (large volume).

Definition of Factory Overhead Cost according to Experts

  • What is Factory Overhead Cost? According to Garrison, et al (2013: 56), Factory Overhead Costs are all manufacturing costs not included indirect materials and direct labor ”
  • What is Factory Overhead Costs according to Halim (2005: 90), Factory Overhead Costs are all production costs that cannot be classified as direct raw material costs or direct labor costs.
  • What is Factory Overhead Cost? According to Salman (2013: 26), Overhead costs are production costs incurred by the company in addition to raw material costs and direct labor costs. Factory overhead costs include the cost of supporting or auxiliary materials, the cost of depreciation of plant assets, the cost of renting a factory building, and other overhead costs.

Please to also read what is of Financial Management and its Scope.

Types of Factory Overhead Costs

Factory Overhead Costs can be classified into several types of classifications according to their Behavior relating to changes in production volume and Overhead cost types according to their nature or Object of Expenditure.

A. Types of Factory Overhead Costs by Behavior

Based on its behavior related to changes in production volume, BOP can be divided into 3 types namely Variable Overhead Costs, Fixed Overhead Costs, and Semi-Variable Variable Costs.

A.1. Variable Factory Overhead Costs

Variable Overhead Costs are overhead costs that change in proportion to production volume changes. In other words, this variable Overhead Cost will increase as production volume increases. Conversely, the variable Overhead costs will decrease if the volume of production has decreased. Factory Overhead Costs variables include indirect labor, maintenance, and repair costs of machinery, and the cost of supporting materials.

A.2. Fixed Factory Overhead Costs

Fixed Overhead Costs is the overhead cost that does not change despite the change in production volume. In other words, a fixed cost per unit will decrease if the volume of production increases. Conversely, fixed costs per unit will increase if the volume of production decreases. The fixed factory overhead costs are factory rental costs or factory depreciation costs, depreciation costs of machinery and work equipment, legal costs, and salaries of company executives.

A.3. Semi-Variable Plant Overhead Costs

Semi-Variable Overhead Costs are overhead costs that change not proportional to changes in production volume. That is, this Semi-Variable Cost has the characteristics of fixed overhead costs and variable overhead costs or it can also be said that these semi-variable costs are partly fixed and partly variable.

Variable Overhead Costs can be fixed at a certain level of production activities and varies after a certain level of production. Examples of this semi-variable overhead costs are electricity costs which in certain production volumes will remain the same but these electricity costs will increase if there is an increase in production volume at a certain level.

B. Types of Factory Overhead Costs by Nature or Object of Expenditures

Based on its nature, Factory Overhead Costs can be divided into Costs of Auxiliary Materials or Indirect MaterialsIndirect LaborIndirect Expenses.

B.1 Material Costs Supporter or Indirect Materials

Cost of Auxiliary Materials or Indirect Materials Cost is the cost of materials used to complete a product but in a relatively small amount and difficult to trace its presence in the finished product. These indirect or auxiliary materials, for example, such as cleaning fluid used to clean production machines, the glue used to attach the paper to the production of reading books or gloves used by workers to prevent fingerprints in the production of cellphones and so on.

B.2 Indirect Labor Costs

Labor Costs are costs incurred for hiring labor that is not physically related to the product manufacturing process or with the aim of helping workers produce a product. Examples such as Foreman and Production Manager, Administrative Staff, Personnel Staff, Accounting Staff, and so forth.

B.3. Indirect Costs ( Indirect Expenses )

In addition to the cost of supporting materials and indirect labor costs, there are other indirect costs that are not directly connected to the product or service produced by the company but without incurring these indirect costs, production cannot produce the needed product. These costs are also basically not easy to be allocated accurately to the product units. These indirect costs are electricity costs, water costs, insurance costs, rental fees (buildings, machinery, motor vehicles), asset depreciation costs, maintenance, and repair costs.

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