Defining Fixed and Variable Components of Factory Overhead Home | FAQs & Troubleshooting

 

Some of the costs included in factory overhead are fixed costs that do not vary with the amount of production. Costs such as rent, property taxes, and depreciation are commonly termed "fixed overhead costs."

Other costs, such as the amount of electricity or gas consumed in furnaces to heat parts, or the amount of lubricating oil used for machinery, depend on how many hours the equipment is actually producing product. These costs are called "variable overhead costs" because they vary with the amount of product produced.

While it is acceptable from an accounting standpoint to apply factory overhead at the end of the accounting period, this does not allow for timely reporting of manufacturing costs when work orders are completed to inventory. Instead, it is customary to apply factory overhead to each production order using predetermined factory overhead rates.

The Work Order module allows you to define both fixed and variable overhead rates, and to base them on hours, a percentage of cost, or a combination of both. The overhead rates are maintained for each operation code using Operation Code Maintenance. This option allows you to maintain separate overhead rates for different operations performed at the same work center.

For more information, see Factory Overhead.