Factory burden, also known as factory overhead or manufacturing overhead, refers to all the indirect factory costs associated with manufacturing a product. These costs are not directly tied to a specific unit of production, but they are necessary for the overall manufacturing process.
Factory burden includes costs such as:
- depreciation: This includes the depreciation of manufacturing equipment and the factory building itself.
- Utilities: These are costs associated with the operation of the factory, such as electricity, gas, and water.
- Maintenance: Costs for routine repairs and maintenance of the manufacturing equipment and the factory.
- Factory Management Salaries: Salaries and wages of factory management and staff who do not directly work on the production line but are necessary for the operation.
- Insurance: Costs for insurance related to the factory or manufacturing equipment.
- Property taxes: Taxes related to the property where the factory is located.
It’s important to note that factory burden does not include the direct costs of manufacturing, such as raw materials and direct labor (the workers who are actually making the products). These direct costs are typically accounted for separately. The factory burden costs are usually allocated to the cost of goods manufactured based on some allocation method such as direct labor hours or machine hours.
Example of Factory Burden
Let’s consider a fictional company “BikeCo” that manufactures bicycles.
In addition to the direct costs of manufacturing a bicycle, such as the cost of metal for the frame, the cost of the bicycle seat, wheels, and the labor costs for the workers who assemble the bikes, BikeCo also incurs several indirect costs related to its factory.
These indirect costs, or factory burden, might include:
- Depreciation: BikeCo owns a manufacturing facility and equipment used to assemble the bicycles. Each year, a portion of the cost of this facility and equipment is recorded as depreciation expense.
- Utilities: The factory requires electricity to power the machines, heat in the winter, cooling in the summer, and water for the restrooms.
- Maintenance: Occasionally, BikeCo needs to repair a piece of manufacturing equipment or fix a leak in the factory roof.
- Factory Management Salaries: BikeCo has a factory manager and several supervisors who oversee the production process. Their salaries are part of the factory burden because they aren’t directly involved in assembling bikes.
- Insurance: BikeCo pays for insurance to protect against damage to the factory and equipment, or potential liability issues related to the factory operations.
- Property taxes: BikeCo owns the land where the factory is located, and must pay property taxes to the local government.
These factory burden costs aren’t tied to a specific bicycle, but they’re necessary for BikeCo to manufacture bikes. When BikeCo calculates the cost of its bikes for inventory and cost of goods sold purposes, it will include an appropriate portion of these factory burden costs in addition to the direct materials and direct labor costs.