Characteristics of Factory overhead or manufacturing overhead: Factory overhead possesses two characteristics that require specific recognition and consideration if products are to be charged with a fair share of these expenses.
These characteristics of factory overhead deal with the particular relationship of factory overhead to
(1) the product itself and
(2) the volume of production.
Unlike direct materials and direct labor, factory overhead, otherwise manufacturing overhead is an invisible part of the finished product. No materials requisition or labor time ticket can indicate the amount of overhead, such as factory supplies or indirect labor, that enters into a job or product. Yet factory overhead is as much a part of a product’s manufacturing cost as direct materials and direct labor.
Because of the impossibility of tracing factory overhead to specific jobs or specific products, some more or less arbitrary overhead allocation must be made. A properly predetermined factory overhead rate permits an equitable and logical allocation, therewith abandoning the use of actual cost for costing purpose.
The second characteristics of factory overhead deals with the change that many items of overhead undergo with a change in production volume. First, the total amount of fixed overhead remains relatively constant regardless of changes production volume, yet the fixed overhead per unit of output varies with production volume: second, semi variable cost vary but not in proportion to units produced ;and finally, only the variable costs vary proportionately production output.
Therefore, as production volume changes, the combined effect of these different overhead patterns can cause unit manufacturing cost to fluctuate considerably unless some method is provided to stabilize overhead costs charged to the units produced.
