What type of cost is factory rent

Articles Topics Index Site Archive. About Contact Environmental Commitment. What is Factory Cost? Direct Materials This is the cost of those materials directly associated with the production of goods.

Direct Labor This is the cost of labor directly associated with the production of goods. Manufacturing Overhead This category is comprised of all the costs incurred that are needed to run a factory, but which are not associated with a specific unit of inventory.

Accounting for Factory Costs Manufacturing overhead is typically assigned to individual units of production, based on a rational and consistently-applied allocation methodology. Variations on the Factory Cost Concept The "factory cost" term is sometimes applied only to manufacturing overhead costs, without consideration to the costs of direct materials or direct labor.

These costs include the wages and other benefits paid to the factory staff or to the employees that are involved in the manufacturing of goods. For example, workers salary who works in the factory to manufacture goods is the direct labor cost Direct Labor Cost Direct labor costs refer to the total cost incurred by the company for paying the wages and other benefits to its employees against the task performed by them, which are straight away related to the manufacturing of the products or provision of the services.

These costs include all the costs that are directly linked to the production of goods except direct material and direct labor costs. Traditionally these costs are divided into three different categories, which include direct material costs, direct labor cost, and manufacturing overheads.

Now, in order to calculate this cost, the following steps can be used:. Step 1: Firstly, determine the total value of the direct material costs required for the manufacturing of the goods. These are basically the costs of the material which are associated directly with the manufacturing of the goods of the company. Step 2: Then, determine the total value of the direct labor costs required for the manufacturing of the goods. Once you sign the lease, the rent is the same regardless of how much you produce, at least until the lease runs out.

Fixed costs can take many other forms: for example, the cost of machinery or equipment to produce the product, research and development costs to develop new products, even an expense like advertising to popularize a brand name.

The level of fixed costs varies according to the specific line of business: for instance, manufacturing computer chips requires an expensive factory, but a local moving and hauling business can get by with almost no fixed costs at all if it rents trucks by the day when needed.

Variable costs , on the other hand, are incurred in the act of producing—the more you produce, the greater the variable cost. Labor is treated as a variable cost, since producing a greater quantity of a good or service typically requires more workers or more work hours. Variable costs would also include raw materials. The data for output and costs are shown in Table 7. The first two columns of the table show the quantity of haircuts the barbershop can produce as it hires additional barbers.

The third column shows the fixed costs, which do not change regardless of the level of production. The fourth column shows the variable costs at each level of output. These are calculated by taking the amount of labor hired and multiplying by the wage.

Such expenditures are known as factory overheads. The factory overhead is the total of all costs other than direct costs incurred to maintain and run the production facility or factory. These are also referred to as production overheads or works overheads.

Since overheads cannot be allocated to cost units directly, the following steps are necessary for its proper accounting:. Under normal circumstances, the following expenditures are included in and treated as factory overheads:. True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute , as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.