Production Overhead | Accounting

The below mentioned article provides a note on production overhead.

The production cost is inclusive of all direct material, direct labour, direct expenses and manufacturing expenses. The manufacturing expenses is inclusive of all indirect materials, indirect labour and indirect expenses concerned with manufacturing activity which starts with supply of materials and ends with primary packing of the product. Production cost is also called ‘manufacturing cost, works cost, factory cost’.

The manufacturing expenses which can be classified as production costs include the following:

(a) Factory rent, rates, lighting and heating.

(b) Insurance of plant and machinery, factory buildings, furniture and equipment.

(c) Repairs and maintenance of plant and machinery, factory premises.

(d) Salaries, wages and incentives to indirect workers and staff like factory watch and ward, office boys, timekeepers, storekeepers, factory clerical staff, maintenance staff, tool room operators etc.

(e) Idle time wages.

(f) Fire protection service.

(g) Carriage inwards.

(h) Canteen and staff welfare.

(i) Depreciation of plant and machinery, factory buildings and other assets.

(j) Cost of estimation department, drawing office, quality control department etc.

(k) Remuneration paid to directors and other higher officials concerned with production and factory management.

(l) Consumable stores and material of little value.

(m) Factory administration cost like printing and stationery, postage and telegrams, telephone, computer department cost.

The representative types of production overheads and their basis of apportionment is given below:

Type of overhead:

1. Supplies,

2. Repairs to plant and machinery,

3. Rent, rates and taxes, maintenance, heating, repairs and depreciation of factory buildings,

4. Lighting,

5. Power,

6. Depreciation, insurance, repairs and maintenance of plant and vehicles,

7. Personnel, staff welfare, canteen wages, cost office,

8. Stores,

9. Carriage inwards,

10. Maintenance,

11. Inspection,

12. Remuneration of works director,

13. Indirect wages,

14. Fire insurance, and

15. Purchase department expenses.

Basis of apportionment:

1. Actual supplies to different departments,

2. Direct labour hours, machine hours, direct wages, plant value,

3. Floor area occupied by each department,

4. Number of light points, area occupied, meter readings of different departments,

5. H.P. or KW hours of machines,

6. Book value or original cost of asset,

7. Number of employees or wages paid of different departments,

8. Number of stores requisitions, value of,

9. Value of material issued,

10. Maintenance hours, maintenance wages,

11. No. of production employees, number of jobs, number of inspection tickets,

12. Direct labour hours, wages paid, number of,

13. Direct labour cost,

14. Capital cost of plant and buildings, value of, and 

15. Number of purchase orders, value of purchases.