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Factory Overhead

Factory Overhead refers to indirect expenses incurred in factory operations, excluding direct costs and labor. There are three main types of overhead: fixed overheads, which remain constant; variable overheads, which fluctuate with business activity; and semi-variable overheads, which have both fixed and variable components. Understanding these overheads is essential for managing costs in manufacturing businesses like the Gibson guitar factory.

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27 views2 pages

Factory Overhead

Factory Overhead refers to indirect expenses incurred in factory operations, excluding direct costs and labor. There are three main types of overhead: fixed overheads, which remain constant; variable overheads, which fluctuate with business activity; and semi-variable overheads, which have both fixed and variable components. Understanding these overheads is essential for managing costs in manufacturing businesses like the Gibson guitar factory.

Uploaded by

Imtiaz Pias
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Factory Overhead, also known as manufacturing overhead, includes all

indirect expenses incurred by the business in the regular running of a


factory’s operations. It doesn’t include the direct cost and direct labour.
Think about the Gibson guitar factory. They produce guitars and other
guitar accessories. Costs that can be traced are wood and materials.
Some costs that can’t be traced directly like the electric bills can’t be
separated and traced back to any specific guitar .Yet, the overhead
costs are unavoidable.

Types of Overheads

There are three main types of overhead that businesses incur. The
overhead expenses vary depending on the nature of the business and
the industry it operates in.

Fixed overheads: are costs that remain constant every month and do
not change with changes in business activity levels. Examples of fixed
overheads include salaries, rent, property taxes, depreciation of assets,
and government licenses.

Variable overheads are expenses that vary with business activity levels,
and they can increase or decrease with different levels of business
activity. During high levels of business activity, the expenses will
increase, but with reduced business activities, the overheads will
decline or even be eliminated.

Examples of variable overheads include shipping costs, office supplies,


advertising and marketing costs, consultancy service charges, legal
expenses, as well as maintenance and repair of equipment.

Semi-variable overheads have some of the characteristics of both fixed


and variable costs. A business may incur such costs at any time, even
though the exact cost will fluctuate depending on the business activity
level. A semi-variable overhead may come with a base rate that the
company must pay at any activity level, plus a variable cost that is
determined by the level of usage.

Examples of semi-variable overheads include sales commissions, vehicle


usage, and some utilities such as power and water costs that have a
fixed charge plus an additional cost based on the usage.

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