FOH Vs. COH Inventory

In any manufacturing operation, the activities and supplies not directly in the product are considered overhead.
In any manufacturing operation, the activities and supplies not directly in the product are considered overhead. (Image: Felipe Dupouy/Lifesize/Getty Images)

Factory overhead (FOH) and corporate overhead (COH) are different cost accumulations that a manufacturing firm applies to the cost of producing its products to reflect the total or real cost of production. FOH represents the cost of providing and maintaining its facility and the activities that make it possible to produce its products. COH includes the non-manufacturing costs of operating the business on the whole and maintaining it as an ongoing entity. Each type of overhead differently affects the cost/value of work in process (WIP) and finished goods inventory.

Factory Overhead (FOH)

The total cost of producing a manufactured good consists of three cost categories: direct labor, direct material and factory overhead. Direct labor is the cost of the human resources that perform manufacturing tasks directly in the production of a good. Direct material is the cost of any purchased materials or components that become a part of or an attachment to a product.

Factory overhead (FOH) includes the costs that are not direct labor or materials, but are associated with the manufacturing of a product. Essentially, if you subtract all of the direct labor and material costs from the total cost of a factory over a given time period, the result is FOH.

Corporate Overhead (COH)

Corporate overhead (COH) includes the costs of running a company and its support or cost centers. A cost center is any company activity or department that does not manufacture a product or provide a service for sale. COH represents the cost of providing centralized services to the manufacturing divisions of a corporation.

Examples of COH are corporate administration, planning, centralized accounting, purchasing, and legal and information technology services. Because these services occur outside the production facility and function, they are not a part of FOH. For this reason, the costs of these services are applied as overhead separately from FOH.

Overhead Allocation

To allocate FOH costs, most companies use an overhead cost driver, such as units produced, labor hours, or labor costs. To calculate the overhead cost driver, a company divides its total FOH by a cost driver statistic (for a given period) to compute the overhead application rate. The overhead application rate applies the overhead to each of the standard cost units (units, hours, dollars). The result is that the cost/value of each item in inventory, regardless of its category, includes its share of the FOH. For example, suppose a company reports 1,000 hours of labor in production for the last quarter in which FOH is $5,000. The allocation to inventory is $5.00 for each labor hour used to manufacture each product.

The allocation of COH is a very different matter because COH costs cannot be associated with the manufacturing process. In most cases, the allocation of COH uses either a static or a dynamic basis. A static allocation uses some standard unit, such as occupied square feet or number of employees to determine the allocation percentage of COH for each operating unit.

A dynamic allocation method uses the count or proportion of some activity to distribute evenly overhead costs. Many dynamic allocations are considered to be use fees, such as for the use of the copy center, print shop, telephone system, or other count or activity-based services. Dynamic allocations are rare for total COH and are more common just for specific shared or centralized services.

Inventory and Overhead

Generally, a manufacturing company categorizes its inventory into three types: purchased materials, work in progress (WIP) and finished goods. Purchased materials include any raw materials, parts or components. WIP includes incomplete manufactured products, sub-assemblies or unfinished goods. Finished goods are ready-to-sell products.

Simplistically, a manufacturing company computes its profits by subtracting expense from revenue. Using this high-level calculation, profit is the revenue from selling products minus the overhead (expenses) of manufacturing the product. Accountants reason that the overhead expenses of running the factory (FOH) should be included in the cost (value) of the product itself. After all, without these costs, there would be no manufacturing at all. So, an overhead application rate is devised and used to allocate overhead costs to the inventory.

As discussed earlier, COH costs are more generic in nature and are applied to the manufacturing operation without a direct tie to direct labor or materials. Some companies carry COH as an operating expense and others add COH to its FOH for cost allocation of overhead.

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