FACTORY

OVERHEAD
 The cost of running a business
that can't be directly attributed to
a product or service. 
Factory A cost that the business has to
Overhead incur in order to produce its
product, but the cost can't be
traced back to the production of
the product.
 Sometimes, they are called
indirect cost because they are
indirectly related to the products
Factory being produced. 
Overhead Also called as conversion cost
because these are costs incurred
to convert a raw material into a
finished good.
Some other examples of Factory
Overheard Costs:
• Insurance
• Rent
• Building
Maintenance
• Property Taxes
• Machine
Maintenance
Production Cost
Product Cost
Cost that are incurred  to create a
product that is intended for sale to
costumers.

Includes:
Direct Material (DM), Direct
Labor (DL), and Manufacturing
Overhead (MOH). 
1. DIRECT MATERIAL
These are the cost of raw materials or parts
that go directly into producing products. 
For example: If company A is a toy
manufacturer, an example of direct material
cost would be the plastic used to make the toys.
2. DIRECT LABOR
These are the wages, benefits, insurance that
are paid to the employees who are directly
involved in manufacturing and producing the
goods.
 3. Manufacturing Overhead
 Thisincludes direct factory- related costs that are incurred when
producing a product such as: cost of machinery and cost to operate the
machinery. 
 This also includes indirect cost such as:  
      A. Indirect Materials – materials that are used in the production
process.
          Examples: Glue, oil, tape, cleaning supplies and etc.
      B. Indirect Labor – labor of those who are not directly involved in the
production of products.
          Examples: Security guards, supervisors and etc.
 Example of Product Costs
Company A is a manufacturer of tables, the product costs includes:
 Direct Material: The cost of wood to create the tables.
 Direct Labor: The cost of wages and benefits for the carpenters to create
the tables.
 Manufacturing Overhead (indirect material): cost of nails used to
hold the tables.
 Manufacturing Overhead (indirect labor): cost of wages for the
security guards.
 Manufacturing Overhead (other): cost of factory utilities.
Company A produced 1,000 tables. The company incurred

cost of:
 $12,000 on wood
 $2,000 on wages for carpenters and $500 on wages for security guards
 $100 for a bag of nails 
 $500 for factory rent and utilities.

TOTAL PRODUCTION COST:

$12,000 (DM) + $2,000 (DL) + $100 (Indirect material) + $500 (indirect labor) + $500
(other cost) = $15,100. 
As this is the cost to produce a thousand tables, the company has a per unit  cost of
$15.10 ($15,100/ 1,000).