Factory overhead, also called "manufacturing overhead" or "factory burden," comprises the indirect expenses associated with the operations of a manufacturing plant; these costs cannot be directly charged to a specific product or project. All expenses that fall under under factory overhead are divided into three different subcategories: indirect material, indirect labor and other indirect costs.
Direct vs. Indirect Expenses
Almost every factory or production plant requires employees to undertake the production. As these employees are associated directly with the production process, the wages paid to them are considered direct expenses. Similarly, the cost of material used directly for producing specific goods are also direct expenses. Indirect expenses, on the other hand, are incurred indirectly during the production process and do not result in actual production. Such expenses often facilitate production and make it more efficient.
Indirect labor refers to the cost of those employees who are associated with the production process, but not on specific units or products; they indirectly produce goods and services by supporting the production facility. Indirect labor costs include the cost of factory supervision, inspection teams, superintendents, factory managers and clerks.
Indirect materials are those not directly used as raw materials for the production of goods and services. The use of indirect material makes the production process possible, more efficient and safer. Indirect materials include lubricants, fuels, cleaning chemicals and protective gear.
Other Indirect Costs
Other indirect costs include rent, property tax on the factory premises, fire insurance, depreciation of the plant and machinery, repairs and maintenance of machinery, utilities, and taxes. These costs are further classified as either fixed or variable factory overhead.
Fixed & Variable Factory Overhead
Expenses that do not change with changes in production are called fixed expenses, or fixed factory overhead, and include property insurance, depreciation, property taxes and salaries for non-production employees. Variable expenses change in direct proportion to the production of goods and services; these include heating, electricity, water, indirect labor and indirect materials.