Which of the following is a factory overhead cost?
What is Factory Overhead?
Explanation
You are free to use this image on your website, templates, etc, Please provide us with an attribution linkArticle Link to be Hyperlinked Classification of Factory OverheadThese overheads are incurred on account of meeting the regular functioning of the factory and keeping the administrative expensesAdministrative expenses are indirect costs incurred by a business that are not directly related to the manufacturing, production, or sale of goods or services provided, but are necessary for the smooth functioning of business operations, such as information technology, finance & accounts.read more incurred regularly associated with the working of the factory. Therefore, it can be classified in several ways. Some of the most popular classification techniques are enumerated below: #1 – Percentage of Direct Material CostIt is the simplest and the most popular method in those cases where the factory overhead cost is substantial to the total cost. Under this, the overhead rate is determined, and expenses are absorbed as per the rate. Overhead Rate = (Direct Material Cost / Factory Overheads) * 100 #2 – Percentage to Prime CostAnother technique to classify Factory overhead is to compute it as a percentage of the prime cost (direct material cost, direct labor cost, and direct expenses cost). #3 – Percentage to Direct Labor CostUnder this, it is classified as a percentage of the direct labor cost incurred by the business. However, the method lacks recognition of time devoted to work by skilled and unskilled workers, leading to biased results. Examples of Factory OverheadABC International is into manufacturing oh sports shoes. The company manufactures customized sports shoes based on customer requirements. Recently ABC International has decided to quote for a tender comprising 10000 sports shoes for the LIFA brand based out of Norway. ABC International has furnished the following cost expected to incur in the manufacturing of 10000 shoes: ABC International charges a 20% gross margin on direct costsDirect cost refers to the cost of operating core business activity—production costs, raw material cost, and wages paid to factory staff. Such costs can be determined by identifying the expenditure on cost objects.read more and a 10% margin on factory overheads. Therefore, based on the same, the price at which ABC International will quote for manufacturing 10000 shoes is as follows: Calculate the total manufacturing overheadManufacturing Overhead is the total of all the indirect costs involved in manufacturing a product like Property Tax on the production premise, Remunerations of maintenance personnel, Rent of the manufacturing building, etc. read more: Calculate the selling price per unit: Thus ABC International should quote $3.33 to LIFA Brand for manufacturing 10000 sports shoes. How does the Business account for Factory Overhead?
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Recommended ArticlesThis article has been a guide on What is Factory Overhead & its Definition. Here we discuss its classification and examples along with its advantages and disadvantages. You can learn more about it from the following articles –
What is included in factory overhead costs?This includes the costs of indirect materials, indirect labor, machine repairs, depreciation, factory supplies, insurance, electricity and more. Manufacturing overhead is also known as factory overheads or manufacturing support costs.
What are three 3 examples of factory overhead?Examples of Overhead Costs. Rent. Rent is the cost that a business pays for using its business premises. ... . Administrative costs. ... . Utilities. ... . Insurance. ... . Sales and marketing. ... . Repair and maintenance of motor vehicles and machinery.. Which of the following is a overhead cost?Overhead expenses include accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities.
Which is not a factory overhead cost?All expenses incurred outside the manufacturing process are not considered factory overhead. For example, wages paid to the company president, manager, or human resources employees are considered administrative overhead, as is all money spent on public relations and accounting.
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