How to Calculate Total Factory Overhead Cost

Factory overhead cost represents all indirect expenses incurred during the manufacturing process. Understanding this cost is important for businesses, particularly those in manufacturing, as it directly impacts product pricing, profitability analysis, and financial reporting. Accurately calculating these costs helps in making informed decisions about production efficiency and overall business strategy.

Understanding Factory Overhead

Factory overhead encompasses all manufacturing costs that are not direct materials or direct labor. These costs are necessary for production but cannot be easily traced to a specific unit of product. Unlike direct costs, which are directly attributable to the creation of a product, factory overhead supports the overall production environment. For instance, raw materials like wood for furniture are direct material costs, and wages paid to assembly line workers are direct labor costs.

Factory overhead, also known as manufacturing overhead or factory burden, supports the manufacturing process indirectly. This category includes expenses that are incurred regardless of whether a single unit or thousands of units are produced, such as factory rent, and expenses that fluctuate with production volume, like electricity for machinery. These indirect costs are necessary for the production facility to operate effectively, even though they do not become a physical part of the product.

Categorizing Overhead Costs

Factory overhead costs can be broadly categorized into indirect materials, indirect labor, and other indirect manufacturing expenses. Indirect materials are items used in the production process that do not become a significant part of the final product, or whose cost is impractical to trace to individual units. Examples include cleaning supplies for the factory floor, lubricants for machinery, and small tools like screws or tape. Protective gear for workers, such as disposable gloves, and packaging materials for finished goods are also examples.

Indirect labor refers to the wages and benefits paid to employees who support the manufacturing process but are not directly involved in the physical creation of the product. This includes the salaries of factory supervisors, quality control inspectors, and maintenance staff who keep machines operational. Janitorial staff wages and security personnel are other examples who ensure the safety of the production premises. Their work supports a smooth production flow but is not directly tied to specific product output.

Other indirect manufacturing costs cover a range of expenses for the factory’s operation. These include the rent or lease payments for the factory building, utilities such as electricity, water, and gas consumed within the production facility, and depreciation on manufacturing equipment and the factory building itself. Factory insurance premiums, property taxes, and equipment repairs and maintenance costs are also included.

Collecting Relevant Cost Data

Gathering the numerical values for factory overhead costs requires reviewing various financial records. For indirect materials, invoices from suppliers for items like cleaning solutions, lubricants, or small parts provide the necessary data. These invoices detail quantities purchased and their costs.

Information for indirect labor costs is found in payroll records, itemizing salaries, wages, and benefits paid to factory supervisors, maintenance technicians, and other support staff. Utility bills provide specific figures for electricity, gas, and water consumed by the factory.

Depreciation schedules offer the annual or monthly depreciation expense for manufacturing equipment and the factory building. Insurance statements provide the cost of coverage for the production facility, while property tax assessments detail the taxes due on the factory property. Consistent record-keeping ensures only costs directly related to manufacturing are included.

Summing the Overhead Costs

Once all relevant factory overhead costs have been identified and their corresponding numerical data collected, the final step involves a straightforward summation. This calculation adds all indirect manufacturing expenses for a defined period, such as a month, quarter, or year.

The formula for this calculation is: Total Factory Overhead = Sum of all identified indirect manufacturing costs. For example, if a factory’s monthly indirect material costs are $8,000, indirect labor costs are $9,000, and other indirect costs (like utilities, rent, and depreciation) sum up to $27,000, the total factory overhead for that month would be $44,000. This figure represents the complete expense of maintaining and operating the production facility beyond direct material and labor costs.