Factory Overhead Cost Elements Quiz

Factory Overhead Cost

• Factory overhead cost includes fixed and variable cost elements

Fixed Cost Elements

• Fixed overhead does not change with increases in levels of production
• Examples of fixed overhead include:
  • Mortgage or rent for buildings such as a headquarters office
  • Salaries for administrative staff, managers, and supervisors
  • Taxes and insurance

Variable Cost Elements

• Variable overhead fluctuates according to levels of production
• Examples of variable overhead include:
  • Production supplies
  • Energy costs to run production lines
  • Wages for those handling and shipping the product
• Variable overhead moves in tandem with changes in production output

Factory Overhead Variance

• Factory overhead variance is separated into controllable variance and volume variance

Controllable Variance

• Reflects the difference between actual overhead costs incurred and budgeted overhead costs
• Measures the efficiency and effectiveness of management in controlling overhead costs
• Includes only costs that management can control or influence directly

Volume Variance

• Arises due to the difference between budgeted level of activity and actual level of activity achieved
• Measured in terms of standard hours or machine hours