Factory-level cost

Definition

Factory-level costs are overhead expenses that support the entire production process and cannot be traced directly to individual products. These costs generally include maintenance, utilities, and factory management salaries.

5 Must Know Facts For Your Next Test

1. Factory-level costs are considered part of fixed manufacturing overhead.
2. These costs are not assigned to specific products under Activity-Based Costing but rather allocated based on a rational formula.
3. In variable costing, factory-level costs are treated as period costs and expensed in the period incurred.
4. Under absorption costing, factory-level costs are included in the cost of goods sold.
5. Accurate allocation of factory-level costs is crucial for determining product profitability.

Review Questions

• How are factory-level costs treated under activity-based costing?
• What is the difference in handling factory-level costs between variable and absorption costing methods?
• Why is it important to accurately allocate factory-level costs?

Related terms

Activity-Based Costing:

A method that assigns overhead and indirect costs to specific activities related to production.

Variable Costing:

A costing method where only variable manufacturing costs are included in product cost, while fixed manufacturing overhead is expensed in the period incurred.

Absorption Costing:

A costing method including all manufacturing costs—both fixed and variable—in the cost of a product.