What Is a Factory Cost?

Daniel Liden

"Factory cost" is a term used to refer to the total cost of producing a given product at the point of production, such as at a factory. The total factory cost of a product is composed of the labor and materials that actually go into the final product as well as the required overhead costs. Overhead costs are necessary expenses that do not actually contribute directly to the final product, such as electricity necessary to operate the factory lights and clerical labor to manage logistical concerns in the factory. The cost of producing a given product at the point of production can change over time based on the cost of labor, the availability of raw materials, and a wide range of other factors.

Factory cost is the total cost of producing the product at a place like a factory.
Factory cost is the total cost of producing the product at a place like a factory.

The cost of raw materials necessary for producing a given product is among the most important and substantial contributors to factory cost. Without the necessary raw materials, the product itself simply cannot be produced. As such, the cost of raw materials can drastically affect factory cost, especially if the cost of such materials tends to change over time. Labor is also a highly important component of the cost of production, though the costs of labor are less likely to change dramatically or unexpectedly, and it is generally possible to maintain production with a reduced labor force when necessary.

Indirect labor such as maintenance staff is considered to be part of a factory's overhead cost.
Indirect labor such as maintenance staff is considered to be part of a factory's overhead cost.

Many of the costs associated with operating a factory do not directly contribute to the production of a product and are, therefore, considered to be "overhead costs" or "factory burden costs." Overhead factory cost includes all expenses except for the materials and labor that directly contribute to the production of the raw materials. Indirect labor, such as quality assurance and factory maintenance staff, for example, are considered to be overhead cost. Overhead factory cost also includes such costs as insurance paid on equipment and property; cleaning expenses; and in some cases, benefits such as insurance for employees.

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It is possible for factory cost to change over time, which can threaten the viability of continued production if costs rise sharply. Most costs tend to increase gradually over time as a result of inflation and other economic factors, and it is usually necessary to increase product prices accordingly. In some cases, however, the costs of various components of factory cost can be quite volatile and may increase or decrease sharply, or may change seasonally. This is most common with raw materials, and it can result from resource scarcity, changing government regulations, or a range of other factors.

Overhead, raw materials and labor are used to determine an item's factory cost.
Overhead, raw materials and labor are used to determine an item's factory cost.

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