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Factory Overhead

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 Factory Overhead
• Factory overhead is the costs incurred during the
manufacturing process, not including the costs of direct labor

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and materials. Factory overhead is normally aggregated into
cost pools and allocated to units produced during the period.

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It is charged to expense when the produced units are later
sold as finished goods or written off.
• The allocation of factory overhead to units produced is
avoided under the direct costing methodology, but is
mandated under absorption costing. The allocation of factory
overhead is required when producing financial statements
under the dictates of the major accounting frameworks.
 Distribution of factory
overheads
• Distribution of factory overheads involves three stages :

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• 1) Collection and classification of factory overheads
• 2) Departmentalisation of factory overheads
•

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3) Absorption of factory overheads.
 Collection and classification of
factory overheads

• overheads-All factory overheads would be

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• collected and classified under appropriate
accounting headings, e.g. factory rent,
• insurance, lighting, depreciation etc. Each

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heading will be given appropriate standing
• order number.
 Departmentalisation of factory
overheads
• The term departmentalisation of overheads refers to the allocation and apportionment
• of over heads among various departments. In case of factory overheads it involves :
• a) Allocation and apportionment of overheads among Production and Service

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• Departments. Production departments manufacture products while service
• departments help them in this process. For example, in a textile industry the
• yearn and clothes departments are production departments while those of a boiler

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• house and repairs are service departments. This is known as primary distribution
• of factory overheads.
 Absorption of factory
overheads.
• overheads-After the overheads have been
• classified between production and service departments
the costs of service departments

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• are charged to such production departments which have
been benefited by their services

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THANK YOU

BBA102 12/6/2017