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Also known as factory burden or manufacturing overhead, factory overhead is any type of expense that is related to the function of the manufacturing plant that cannot be charged directly to a specific project or product. This designation helps to account for many types of indirect expenses that are necessary to the continued operation of the facility, but are not exclusive to a particular job. While there is some variance in what is thought of as factory overhead, there are a few types of expenses that are universally thought to fall into this category.
It is important to realize that what constitutes factory overhead in one situation may or may not also be classed as a true factory burden in a different setting. This is because the process of producing goods and services is somewhat different from one company to another. For this reason, many companies will evaluate an expense that seems to not be associated uniquely with work on a given contract or the product of a specific good in a product line, and determine if the expense has more of a universal effect on the operation. If it is determined that the expense is more general in nature, it is highly likely to be considered factory overhead.
There is a core group of expenses that tend to be recognized as factory overhead. One of those expenses is quality control throughout the operation. While these efforts do not result in the actual manufacture of goods or services, they do help to make sure that the products that are made available to customers are within the standards set by the company. From this perspective, quality control measures indirectly support the manufacturing effort, but do not participate in the actual creation of the products themselves.
The cleanup of the manufacturing facility is also an example of factory overhead. While not directly contributing to the effort to produce goods, keeping the facility clean does make the environment safer for employees who are directly involved in the production process. A clean work area means less potential for on the job accidents, delays at various points in the manufacturing process, and also less contamination of finished goods.
Insurance coverage is another type of factory overhead. By insuring the manufacturing facility, owners increase the potential of recovery from some catastrophic situation that renders the facility unable to produce goods, thus protecting both the profitability of the business and its assets. Depending on the type of insurance involved, the coverage may also protect the company from lawsuits, natural disasters, equipment failures, and incidences of sabotage. This type of indirect expense protects the operation in general, and is not associated with one specific product that is produced in the facilities.