Factory Overhead Allocation Method

Overhead Allocation
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Overhead Allocation Overview
In many businesses, the cost of overhead is substantially greater than direct costs, so the cost accountant must expend considerable attention on the proper method of allocating overhead to inventory.
There are two types of overhead, which are administrative overhead and manufacturing overhead. Administrative overhead includes those costs not involved in the development or production of goods or services, such as the costs of front office administration and sales; this is essentially all overhead that is not included in manufacturing overhead. Manufacturing overhead is all of the costs that a factory incurs, other than direct costs.
You need to allocate the costs of manufacturing overhead to any inventory items that are classified as work-in-process or finished goods. Overhead is not allocated to raw materials inventory, since the operations giving rise to overhead costs only impact work-in-process and finished goods inventory.
The following items are usually included in manufacturing overhead:
|Depreciation of factory equipment |Quality control and inspection |
|Factory administration expenses |Rent, facility and equipment |
|Indirect labor and production supervisory wages |Repair expenses |
|Indirect materials and supplies |Rework labor, scrap and spoilage |
|Maintenance, factory and production equipment |Taxes related to production assets |
|Officer salaries related to production |Uncapitalized tools and equipment |
|Production employees’ benefits |Utilities