Factory Overhead (FOH)

While ascertaining the overall cost of the finished goods manufactured by a company, we first identify the three basic elements which constitute the product. These, as you may remember, are Materials, Labours, and Factory Overhead (FOH).

Right now, I am going to venture into some details relating to FOH; which are the indirect expenses incurred by the company during the production process, and which become part of the product. Indirect here means that the costs of these expenses cannot be easily identified with a single unit of product produced. For example, when a supervisor looks over the work being done on several units of products the salary of the supervisor which should have otherwise been classified as Labour cost, would be treated as an indirect cost and all indirect costs would fall under the head FOH.

The business continues to spend money on all sorts of expenses like electricity, water charges, watchman's pay, rent, etc., but all of these expenses will only be included in the cost of product if these relate to the factory. For control purposes, the management of a company doesn't just spend money haphazardly without any control tool. Luckily some tools are available to the management which include preparing budgets, using an FOH applied rate, calculating FOH variances, etc. These will be discussed later.

Cost Elements

For a manufacturing concern the basic undertaking is the production of goods which are commonly referred to as finished goods.

Now in order to arrive at the cost of these goods produced it is important to classify the costs which are incurred in the process. Furthermore, if the cost calculated is accurate then it also assists management in determining the appropriate pricing policy.

There are three basic cost elements which are part of an organization's manufacturing process: Materials, Labour, and Factory Overheads.

Materials, as the terminology suggests refers to the cost of materials which are consumed in the production process. Similarly, Labour refers to the wages paid to workers during the production process. Finally, Factory Overheads (FOH) are the indirect expenses which were incurred during the production process.

Under these three heads the costs incurred on the product are classified and this ultimately becomes the part of the finished goods produced.