Understanding Overhead Cost

This time we will discuss about Cost Accounting for Factory Overhead, Actual and Estimated Costs Allocated from understanding to cost classification, happy reading …

Table of contents :

  • Understanding Overhead Cost
  • Factory Overhead Cost Classification
    • Cost of auxiliary materials
    • Indirect labor costs
    • Repair and maintenance costs
  • Alokas method
  • direct i (direct allocation method)
    • Case in point: Direct Allocation Method
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Understanding Overhead Cost

When going to manage a financial budget each month, have you ever set aside a little money to be able to anticipate unexpected expenses? If you’ve ever done this, then you’re the kind of person who always ‘stands up for an umbrella before it rains’.

Currently, there are many people who can manage their financial budgets in great detail.

They also usually have divided their finances into expense categories that they very routinely do every month, for example, the budget for food, gasoline, to the budget for mortgage and car payments.

Unfortunately, not many people have included the “unexpected expense” category in their budget.

In fact, budgeting for unexpected costs in finances is very important in an effort to keep your financial condition very stable.

Preparation of unpredictable expenditure budgets is not only important for the preparation of household budgets, but also very important for companies to do.

The right term to describe the unexpected expenses of a company is factory overhead costs.

Factory overhead costs are production costs that will not be included in the cost of raw materials or direct labor costs.Factory overhead costs usually arise from the costs that must be incurred for the use of additional materials, indirect labor costs, control of production machines, taxes, insurance, to additional facilities required in the production process.

Factory Overhead Cost Classification

Before determining a factory overhead budget, we must be able to classify a factory overhead cost first.

With this classification, it will be easier for us to determine how much budget we will need to set aside as a factory overhead budget according to the business in our company. Factory overhead costs can be classified into 3 krite

Classification of factory overhead costs Based on their nature, factory overhead costs can be divided into:

a. Cost of auxiliary materials

Auxiliary materials that will be referred to in this case are materials that will not be part of the production output as well as materials whose value is very small relative to the price of the whole product.

b. Indirect labor costs

Indirect labor, which is referred to in factory overhead costs, is where the company’s workers whose wages cannot be directly calculated on a product.

c. Repair and maintenance costs

Repair and maintenance costs which will be referred to in factory overhead costs are the cost of spare parts (spare parts), the cost of consumables (factory supplies),

And also the price of services that the company needs to pay for the purposes of repair and maintenance of production machines, vehicles, or other company tools.

Alokas method

direct i (direct allocation method)

In this method, the service department’s BOP if allocated to each production department will enjoy it.


Also Read:   Definition of Devaluation


The direct allocation method will be used if the services that have been produced by the service department are only enjoyed or utilized by the production department, and also no other service department uses the service (the Service Department will not use its services).

Case in point: Direct Allocation Method

CV HAM will process its products through 2 production departments, namely process 1 and process 2, and also supported by 2 service departments, namely the electrical services department (X) or also the machine maintenance service department (Y).

All electric power as well as machine maintenance is often used by the production department in the following proportions:


Calculating this BOP will be budgeted
The BOP allocation from each department is:
1. X
services BOP service department X amounting to IDR 30,000,000 which will all be allocated to each production department with the proportion of each
Process Department 1 being 30% x IDR 30,000,000 = IDR 9,000,000, –
Process 2 Department is 35% x IDR 30,000,000 = IDR 10,500,000 –
Process Department 3 is 35% x IDR 30,000,000 = IDR 10,500,000 –
Total = IDR 30,000 .000, –
2. Services Y
BOP service department Y as much as IDR 60,000,000, all of which are allocated to each production department with a proportion of each:
Department 1 is 25% x IDR 60,000,000 = IDR 15,000,000
Department 2 is 40% x IDR 60,000,000 = IDR 24,000,000 –
Department 3 is 35% x IDR 60,000,000 = IDR 21,000,000, –
Total = IDR 60,000,000


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