Why should factory overhead expenses be separated from corporate overhead expenses
Deepening recession and continuing inflation have caught many companies in a cruel cash and profit squeeze. A growing number are fighting for survival and trying to cut costs to the bone. Thus inventory slashing and all-out attacks on material and direct labor costs are very much the order of the day in many companies. Usually, however, even in real crises, one major area of cost—overhead—escapes successful application of the cost-cutting axe. In most cases there is a simple explanation for this: past efforts to chop overhead expenses have yielded only a meager, short-lived trickle of savings. And that is not surprising. In the average company, thousands of small, frequently unrelated activities make up the bulk of overhead costs. Rather than evaluate each of these activities by itself and in relation to others, as a thoroughgoing attack on overhead would require, top management typically chooses an easier way. So the edicts go out: “Cut overhead costs by 10% across the board!” or “Hold this year’s budget down to the level of last year’s actual costs.” Employees understandably perceive such actions as unfair and arbitrary, as indeed they are. Sometimes only a few recently hired employees are laid off in each department. Sometimes substantial cuts, based on quick employee assessments, are made at every level. In either case the jobs these employees held still have to be done. Since the “survivors” thus become overburdened, frustrated, and demoralized, the cuts are not effective. When management does specify activities that it wants cut, it usually sticks to a few highly discretionary, “big-figure” areas like training programs, advertising, or overtime pay, ignoring sizable opportunities elsewhere. And because the cuts are almost always restored after the heat has died down, the savings turn out to be ephemeral. Small wonder that most knowledgeable managers tend to look elsewhere for ways of improving the “bottom line”! Recently, however, there have been some notable exceptions to the pattern of ineffectual dealing with overhead costs. With a technique called overhead value analysis, a score of corporations in the United States and Europe, threatened by potentially dangerous cost situations, have in the past three years successfully cut their overhead costs (defined very broadly) by roughly 15% to 30%. The dollar savings of these corporations, which include insurance companies and banks, have ranged from under $1 million to about $100 million a year. And these cuts are structural. The savings will stay. In concept there is nothing very complicated about an overhead value analysis. In traditional value analysis, a study team first determines what performance criteria a selected product or item must meet and then either develops a better, lower-cost design or devises an engineering method to accomplish the same results more economically without sacrificing the required level of quality. Companies have adapted this same technique to overhead functions and their costs. In an organized way, the analysis provides an efficient discipline for scrutinizing all the many thousands of activities that make up overhead, identifying all the areas where cuts can safely be made, and, where high quality is a factor, providing a framework for balancing costs and estimated benefits. But overhead value analysis differs from traditional value analysis by making both the managers who incur the costs (suppliers) and those who benefit from them (receivers or demanders) responsible for identifying which costs to cut. Top management and the CEO make the final decisions, but they are guided by the combined judgment of the entire management team. Moreover, overhead value analysis can work quickly. In a company with 2,000 “overhead” employees, such an effort can and should be completed in four months without disrupting day-to-day operations. Usually, the implementation that follows the analysis can be completed within a month if the need is great enough. But the process, though swift, is not painless. Since overhead expenses are typically 70% to 85% people-related and most savings come from work-force reductions, cutting overhead does demand some wrenching decisions. Nevertheless, unless pressures on profits unexpectedly ease off in the months ahead, many companies may find themselves faced with the question not of whether to cut their payrolls, but of how. Overhead value analysis may well provide the most acceptable answers. In this article I shall describe how the approach works, offer some suggestions for its application, and propose some diagnostic questions a company should consider before deciding to launch a full-scale overhead value analysis. First, however, it will be helpful to examine briefly the processes by which overhead costs grow. Why Overhead Areas GrowMany businessmen recognize that their overhead has grown prodigiously in recent years. Between 1950 and 1970 the number of nonproduction workers in manufacturing industry, for example, increased six times as fast as that of production workers. They now account for no less than 40% of all payroll costs. These people are engaged in an immense variety of activities. In a typical industrial or consumer goods company those that can fairly be called overhead make up such functions as corporate accounting, personnel, R&D, and planning, plus a good many subfunctions of so-called line organizations, such as plant engineering, sales administration, brand management, and so on. In the typical company, moreover, one can confidently assume that every one of these activities is costing more than it ought. This is a safe assumption for two reasons: first, because the activities themselves are inherently resistant to analysis and control; second, because the normal functioning of the organization positively encourages them to grow. Let us look at each of these reasons in turn. They Are Scattered and Hard to EvaluateGiven the enormous diversity of overhead activities, it is easy to see why they are so hard to cut. Each of the many types of activity performed in support of a company’s line functions may include a variety of distinct skills or areas of expertise. Even subdisciplines within a single functional area may embrace diverse specialties; accounting, for example, can include cost accounting, capital budgeting, tax accounting, and so on. Generally, this diversity almost guarantees that some overhead activities will be inadequately reviewed by even the most cost-conscious managements. Top executives are quick to see that there is no leverage in assigning someone to study different overhead activities if the results of the work cannot be extended to cover many positions in many departments. Overhead areas in which a number of employees perform similar repetitive tasks, such as typing pools and keypunching, are clearly suited to quantitative analysis. Yet in most organizations activities like these account for a small portion of total overhead costs. Most of the potential savings are elsewhere, scattered throughout the whole organization. At the same time, it is hard to assign tangible benefits to most overhead activities. Partly this is because accounting data tend to hide the real costs of a service; for example, most department budgets show totals for salaries, overtime, telephone, and so on, without breaking these down by individual services. In any case, who is to say precisely what the services of an additional public relations executive or a corporate lawyer are really worth? Or who can really quantify the benefits from the company’s investment in advertising, R&D, or the company newspaper? Finally, the prospect of reducing staff puts any manager in a painful position. It is hard to contemplate eliminating the job of a friend or acquaintance, and harder still when one has very little objective justification. In all likelihood, the termination interview will be an emotionally bruising experience for everyone concerned. Unlike line managers, who are obliged by volume and productivity measures to get used to making hard personnel decisions, most staff managers shy away from such confrontations. Some will even invent elaborate projects just to keep their people occupied. Organizations Foster ThemOver and above the inherent difficulties of controlling overhead activities, almost every company in its day-by-day functioning does three things that tend progressively to inflate its overhead costs. 1. Organizations establish clear boundaries between areas. The necessary division of activities into manageable units separates the suppliers of overhead services from the users. A manager who requests a service, unless he knows the costs of creating it (and he rarely does), cannot judge the ultimate value to the company of providing him with it. Conversely, the supplier of services usually does not know their value in use. Because of this ignorance on the part of suppliers and users, many services are supplied for purposes that do not justify their cost. Others are provided after the need for them has diminished or disappeared. In a food processing company, for example, the accounting department annually produced a substantial report for the government. In examining his overhead costs during this process, the manager made an interesting discovery: the directive requiring the report had been withdrawn five years earlier. 2. Organizations hire professionals to run and staff their service-performing departments. Typically, these people march to a different drummer. They measure themselves against their professional colleagues in other organizations, and they tend to get so absorbed in the technical aspects of their jobs that they lose sight of the overall value of their work to their employers. More often than not, they perform their services at a quality level out of proportion to actual need, and they tend to encourage requesters of these services to demand more of the same. For example, in a package goods company, the head of a market research group was periodically devising new approaches to allocating advertising and promotion funds. The manager was, of course, responding to his perception of the need. Unfortunately, his innovations were concentrated in a period when most of the company’s products were in decline. Furthermore, the marketing managers did not believe or use his data. 3. Organizations reward responsive behavior. Managers tend to be rewarded more for pleasing their superiors than for running a tight ship. Indeed, most managers are sure to be criticized if they don’t come up quickly with the professional answer to a question, or if they fall behind schedule in providing some service. Rather than risk being caught short, most managers would naturally prefer to overspend. The headquarters of one conglomerate, for example, had a telephone system that was elaborately configured to include an impressive array of switching, transferring, multiple-line, and push-button options, with unlimited WATS access. Instead of determining what the communications cost/benefit balance for the company was, the manager was making sure that no one was unhappy with the telephone service—but at a high cost. The managerial instinct for self-protection also encourages overstaffing. It does so in two ways. First, since a manager’s compensation and status are often directly related to the size of his department, he is naturally inclined to build up his area as much as possible. Second, since a manager who finds major opportunities to reduce costs is open to the charge of bad management in the past, most managers are reluctant to take a really critical look at their own staffing levels. In short, overhead costs are a nuisance to control both because of the diversity of the activities they reflect and because they are inherently hard to evaluate. And in most organizations they also have a natural tendency to grow out of control. If a company is to gain effective control of its overhead areas, therefore, it must find a way not only to deal with their troublesome diversity and ambiguity but also, to some extent, to thwart the natural dynamics of the organization itself. How the Process WorksIf, in the face of these difficulties, the enormous task of reducing overhead costs is delegated (in a special way) to every manager in the company, overhead can be successfully cut. All managers either request or supply overhead services, and so together they can recommend in detail which services can be pared back without damaging the organization. By formally placing the burden of the task on all managers at once (usually the lowest-level managers included in the process are those who have roughly 20 to 40 subordinates) overhead value analysis brings requesters and suppliers together to work on what they can see is a common, company-wide task. In this way, managers feel freer to recommend changes. To ensure that the recommendations are soundly based and to guide, even challenge, managers as they go through the process, stage by stage, the chief executive officer will need to appoint a small, high-level task force.1 Three to five task force members working full time for as many months are normally sufficient for a company with up to $75 million in overhead. For larger organizations, more team members, even multiple teams, may be required. Before actually embarking on an overhead value analysis, it is difficult for a company to determine what the optimum low-risk/cost-reduction level is in each organizational unit or function. Inter- or intra-company comparisons or trend analyses seldom shed much light on this question, and in any case they are always open to challenge. Accordingly, to ensure that no reasonable option for cutting costs escapes examination, top management should set an initial cost-reduction target, uniform for all functions, that overshoots whatever the true potential may be. The target that has worked best is 40%. This is a jolting figure when first announced, and admittedly arbitrary; a case can be made for varying it by as much as 10 percentage points either way. But it is not too high to be credible. True, in most functional areas attractive cost-reduction opportunities will most often fall in the 15% to 30% range. Nevertheless, savings opportunities totaling 40% or more are not unusual. Only a really challenging target will (a) foster an exhaustive search for savings options, (b) permit a proper balancing of cost-reduction decisions across the organization, and (c) support, if necessary, a fundamental rethinking of basic services. An additional benefit of the intentional overshoot is that—since no area has been singled out beforehand to achieve a higher target than others—managers down the line usually perceive the target as fair, though rough. Once the target has been set, the overhead cutting program proceeds in four stages: 1. Estimate the cost of overhead end products and services flowing between organizational units. 2. Create an extensive list of options for eliminating or reducing the demand for most of these. 3. Recommend all those options whose cost savings outweigh their likely adverse consequences. 4. Decide the actual cuts to be made. This step is reserved for top management. Let us now consider each of these steps in detail. Estimate the CostsIn the course of supplying end products or services to another unit of the organization, the average manager incurs overhead costs. Ordinarily, he provides these services with reasonable efficiency, and the best way of substantially cutting their costs is to reduce the demand, or requirements, that led to their creation in the first place. Accordingly, each manager responsible for a cost center will be required to: (a) identify the various services his department receives from other cost centers in support of its own activities: (b) list each of the end products or services he supplies (for example, reports, completed forms, analyses, advice, decisions), and state to whom they go; and (c) estimate how much total effort and expense go into each of these services (the results are often eye-opening). Thus a service should be broken down into its various components and their costs. For instance, the end product of one company’s market research unit, which was sent to all branch managers, was a bimonthly analysis of the Nielsen report on each product category. The unit’s effort was supported in turn by processing in the EDP department. Annual costs for the analysis in each product category, then, were made up of the cost of the Nielsen reports, $40,000; the processing in EDP, $5,000; and the market research effort, $2,600—a total of $47,600. It would, of course, take months to trace the flow of every single end product or service and get an accurate fix on its cost. In practice, the task force will need to guide managers in deciding between speed and detail and in estimating, roughly, how much of their subordinates’ time is spent on each of the various services. Because later judgments on the value of these services will be understandably rough, only an order-of-magnitude cost for each service is required. Certain functions, such as EDP and engineering, typically engage in nonrecurrent, and in some respects unique, projects or assignments. Each project, whether currently under way or in a backlog, should be costed as if it were a service. The subsequent search for cost-reduction options will consider not only the impact of paring down the existing projects but also the potential of reducing total in-house staff capacity to handle such projects over the uncertain longer term. One side benefit of this costing step is that it enables managers to compare their list of end products and services with the basic mission or charter of their cost center and with that of major supportive functions. Inconsistencies or mismatches are often clues to services that can readily be reduced or dropped. In one company, for example, the accounting group was responsible for “providing management information for controlling expenses.” Its supporting functions were “preparing budget” and “analyzing and reporting on progress against budget.” The principal supportive tasks for each function and the specific end products were also defined. Before questioning the end products of the supporting functions in detail, however, the manager examined the basic content of the accounting overhead budget, which included such features as elaborate allocation, and even reallocation, of corporate overhead to the operating divisions. Because the basic mission of “controlling expenses” was only marginally satisfied by some of these budget features, dramatic reductions were immediately seen to be possible. Another side benefit of pinpointing costs is that elements of the resulting data base, along with certain other features of this approach, can later on be built into the ongoing budgeting process, providing top management with a better basis for challenging budget submissions. Identify the OptionsGiven the demanding target and the cost estimates, each supplier of services assembles, with task force assistance, a series of “challenge groups,” made up of suppliers and receivers of a related set of services, to analyze the services and suggest options. The assessment of the options occurs at the next stage. Most services have one primary receiver, so the receiver representatives in each challenge group will be drawn from just one area. For services with many receivers—market performance reports or in-house newspapers—a few representative users should be selected to participate in the challenge groups. Occasionally, managers who do not actually receive a particular service or end product should be included in the relevant challenge groups because they are concerned with some aspect of the service. For instance, an insurance company lawyer who sets overall specifications for policyholder contracts would be needed when the specifics of these contracts are questioned. In some companies, the number of meetings required is held to a minimum by: (a) holding meetings for only the highest cost or risk services, and (b) using a “turnaround” form that goes back to the supplier from the receiver; in this way reactions of receivers (with their new ideas) can be documented. Once assembled, the challenge group should take each end product and service in turn and, with the guidance of the task force, should (a) examine feasible ways of reducing requirements for it and (b) suggest a series of possible incremental reductions, short of eliminating the service entirely. Exhibit I shows a framework that has proved useful for thinking through ways of reducing demand. It forces managers to consider every combination of service and cost-reduction options to meet the stretching target. In some overhead areas, it is worth making some effort to find options for streamlining (where a specific service is unchanged, but the costs to produce it are decreased), but in most areas this added effort produces only marginal improvement on the basic approach.  Identifying the Options As a rule, most of the options that might be listed are already known to the supplier of the services. Thus, rather than go through a long analysis of the obvious, the task force should start by asking the manager to produce a tentative list of feasible options. Subsequently, the challenge group will seek to modify and build on this list. Consider the example of a textile manufacturer who was looking for ways to reduce his sales payroll from a total budget of $4 million. One option—closing marginal offices—would have been worth $100,000. Another, worth $500,000, was to get rid of salesmen who sold less than $1 million a year and redistribute their accounts. A third possibility, worth $50,000, was to reassign regional management responsibilities to the office managers of the largest offices, eliminating the regional positions. The challenge group should attempt only to list the best feasible ways (and associated pros and cons) to make substantial cuts in the costs of and demands for a particular service. The group should list all options, no matter how risky, as long as they are technically possible and legal, until it has identified enough of them to meet the initial overall target. After reviewing all the options, top management decides which cuts will actually be made. Effective self-searching by the challenge groups is vital for two reasons:
Each member of the challenge group, therefore, whether supplier or receiver, should assume the individual responsibility to search out all the options and try on his own to identify the best possible ways to achieve the target. The best way to make sure that this happens will differ considerably from company to company and from function to function. In every case, however, it is essential that top management clearly assign the burden beforehand. To reinforce that assignment, companies have used a variety of tactics:
Weigh the Savings Versus the RisksThe amount the company saves from implementing an option identified by a challenge group is usually quite small—a few thousand dollars on average, or less than a full year of work for one person. Consequently, managers are not justified in spending a great deal of time gathering data on each option and deliberating its attractiveness. Rather, they must try to use only the available facts and judgments in deciding between savings and risks. The procedure is as follows. For each of its options, each challenge group states the work-load reduction and cost decrease it expects the change would make. The group also explicitly states the possible adverse consequences of each option, their severity, and the likelihood of their occurrence. If, as often happens, receivers and suppliers disagree sharply on these points, both points of view are recorded for consideration by higher management. Finally, the group ranks its choices among the options in descending order of attractiveness. This step forces lower-level managers to weigh and choose among many diverse alternatives. Whether or not they believe any of the various options should be implemented, they are obliged to indicate a priority list should top management decide that some of the options should be acted on. The challenge groups’ rankings then move up through the chain of command as illustrated in Exhibit II. The Review Process Each higher-level manager critically reviews the resulting options and rankings, challenges any judgments that appear questionable, possibly introduces his own ideas (for example, increasing spans of control, or cutting out a layer of management), and reranks the options according to his own perspective. He may also convene a new challenge group in order to develop additional options or improve judgments. The final ranking decisions are made at whatever level the chief executive officer deems appropriate. In any case, he carefully reviews all options, paying particular attention to the marginal ones where the pros and cons appear to balance. For example, a fairly large bank was weighing the option of getting out of the stock transfer business (which was a manual operation running at a loss) and transferring it to a competitor with efficient, computer-based systems. This would have saved $90,000 a year on payroll costs, but it would have been at the risk of antagonizing one or two key customers. The challenge group ranked this option very low on its list. In the course of the review process, however, top management challenged that option and asked for an intensive search for other feasible options in the same area. The group eventually developed a safer alternative: improving the service and restructuring the prices to achieve breakeven. This option both protected jobs and plugged a continuing cost drain without the risk of jeopardizing customer relationships. Three aspects of the challenge and review process are worth noting: 1. Top executives, with their broad, company-wide perspective, have a chance to see a spectrum of detailed options that are normally known only to lower-level managers. 2. Top management, suppliers, and receivers all agree to all decisions that are made to pare back on the frequency, extent, or quality of services. The responsibility for decisions is thus shared. This is essential, for unless all three parties participate in the decision, the supplier could be “burned” for inadequate performance, the original service level could be reinstated, or both. 3. Top management can use the detailed, ranked lists to tailor overhead reductions in each department or function to appropriate and roughly uniform levels of risk. Make Final DecisionsThe final decisions are a series of rough trade-offs between possible cost savings and possible adverse consequences. A decision matrix is shown in Exhibit III. As a rule, management should approve all options that can be realized at little or no risk, regardless of the savings involved (Exhibit III, Column 1), and drop all options where risks clearly appear to outweigh potential savings (lower parts of Columns 2 and 3). The Tarde-off Decisions With options where the possible penalties and savings appear about equal (upper parts of Columns 2 and 3 in Exhibit III), management’s decision will depend on the company’s strategic need for savings, its management style, and its overall capabilities. And it should be made only after a thorough review. Options left after this review can form a valuable ranked contingency plan to be put into effect should worsening economic conditions make deeper reductions necessary. As most options chosen fall into the low-risk, small-savings category, many managers may wonder how really large overall savings can be achieved. The answer is simple: because so many options are identified and all the decisions are approved at the same time, a company can eliminate a large number of employee positions. Thus with 20 options that represent 12.5 man-years of work spread across 30 employees, management should be able to rearrange work and jobs to eliminate at least 9 or 10 positions. How rapidly the company should implement the options will depend on its circumstances. If the need for cost savings is acute and attrition rates are relatively low, then a certain number of terminations may be required (mitigated as far as possible by generous severance arrangements, job-search assistance, and so forth). Otherwise, the company can wait for attrition to eliminate the jobs and achieve the dollar benefits. Although the associated risks are rarely greater than they appear, the management team may underestimate the adverse consequences of a given option. Most options identified by the challenge groups are reversible, however; the end product or service can be reinstated at a later date if necessary. So far I have been considering only reductions within departments in the company. Where there are company-wide services and expenditures, such as copying, telephones, entertainment, travel, management perquisites, and secretaries, that are often centrally controlled by policy, the task force, rather than interdepartmental challenge groups, should be responsible for evaluating the services and analyzing available options. Most of this work can be completed at the same time as the interdepartmental cutting program, though occasionally more time will be needed to develop a sufficient number of feasible options. Is an Overhead Value Analysis for You?A process of this kind can not only cut a company’s overhead costs by one fourth or more but also yield a number of intangible benefits. First, managers throughout the company often become more sensitive to cost/benefit trade-offs. Second, communications between departments often improve. Third, the program encourages systematic and innovative thinking. Often, managers bring up ideas that are truly creative. Sometimes they are unrelated to overhead costs—for example, modifications to products, changes in sales promotion, and shifts in strategic emphasis. In one company, for example, the program tipped the scales from adding new capacity to three existing plants to building a new plant in a different state. Finally, although top management may be uneasy about the effects of the program on the company’s image with the investment community and the press, investors and investment analysts are more likely to applaud than deride a company for any determined drive to trim excess costs. Top management should, however, watch out for possible undesirable side effects. First, employee morale and motivation may suffer, since many jobs will have to be eliminated. However, when employees become aware that the company is encumbered with low-value or make-work activities and is in serious economic straits, the odds are that morale and motivation have nowhere to go but up. Second, since turnover rates are often highest in the job brackets where minority-group employees are typically concentrated, the company’s minority representation may change, thus laying the company open to pressures from the Equal Employment Opportunity Commission.2 Because its effects are uncertain, management probably ought to consider a company-wide attack on overhead costs in only two situations: (a) when short-term needs to improve profits are acute, and all other areas of cost reduction have been exhausted; or (b) when a badly needed competitive edge in the marketplace cannot be gained without a decisive improvement in the company’s economic structure. Granted either of these conditions, there is one other prerequisite, namely, a strong management structure. Forceful leadership by a tough, tenacious chief executive officer is absolutely essential to make this approach work. And the CEO, in turn, must have the support of a management that is both willing and able to follow his lead. The CEO’s vigorous guidance and active involvement are indispensable throughout. In fact, he needs to make this program his chief priority until it is finished. Although this approach can be confined to particular divisions within a company, such as manufacturing or marketing, its full potential (even within a division) cannot be realized unless it is applied across an entire company. In fairness to himself and his company, then, any CEO who proposes to embark on an overhead value analysis program should try to think through all its ramifications in advance. Specifically, he should ask himself, “Am I prepared to do what is necessary? Would I… …commit myself to achieving a truly demanding cost-reduction goal?” Commitment to such a goal means more than making a public announcement. It requires readiness to make tough decisions about individuals and departments. Is the CEO prepared, for example, to fire the number-two executive in manufacturing if that is a sensible money-saving move? Would he actually drop a substantial part of the market research department for two years or more? …appoint my best managers to control the process?” If an overhead review is to be the company’s top priority for a short time (as it must be to work properly), the task force must be of the highest caliber. But despite the prospect of a large and early payoff, taking three to five of the best and most respected managers away from their regular duties for as long as four months is not easy, particularly if the company is in a shaky economic position. …refuse to accept less than the target already established?” The purpose of a demanding 40% savings goal for every organizational unit is to make sure that almost all cost-cutting options are identified and fairly evaluated. The CEO needs to review in detail each challenge group’s efforts. If he should discover that a particular group has been less than thorough, would he direct them to go back through the process and come up with better options? Would he insist that they keep at it no matter what? …draw sharp lines despite a lack of hard data?” The final decision on each option will result from the systematic but imperfect process of weighing savings versus consequences. The CEO must be prepared to decide on particular options on the basis of data that may be inaccurate or incomplete. And he must be willing to trust the discipline of the process itself to ensure that the recommendations that ultimately reach him have been adequately challenged and considered as they come up the line. For him to insist on elaborate documentation or analysis would hopelessly blunt the thrust and impact of the program. A chief executive who has thought these questions through may well feel a few qualms. There are risks in undertaking any sweeping program of change. But the possibility of cutting total overhead costs by one fourth, with a consequent profit improvement of up to 100% or more, supplies a powerful incentive to take the required risk. 1. See Derek G. Rayner’s Ideas for Action article, “A Battle Won in the War on the Paper Bureaucracy.” HBR January–February 1975, p. 8 for discussion of an entirely different task force approach that focuses on cutting unnecessary reports. 2. See, for example, Theodore V. Purcell, “Case of the Borderline Black” (Problems in Review), HBR November–December 1971, p. 128; see also Antonia Handler Chayes, “Make Your Equal Opportunity Program Court-Proof,” HBR September–October 1974, p. 81. A version of this article appeared in the May 1975 issue of Harvard Business Review. Why is it important that we allocate overhead costs to products?Overhead costs are allocated to products to provide information for internal decision making, to promote the efficient use of resources, and to comply with U.S. Generally Accepted Accounting Principles.
What is the difference between factory overhead and manufacturing overhead?Manufacturing overhead (also known as factory overhead, factory burden, production overhead) involves a company's manufacturing operations. It includes the costs incurred in the manufacturing facilities other than the costs of direct materials and direct labor.
What is the difference between factory overhead and selling and administrative expenses?Distinguish between (a) factory overhead and (b) selling and administrative overhead. Only indirect expenses incurred during production constitute factory overhead while selling and office overhead expenses have little bearing on the production process.
What overhead costs should be included?Some examples of overhead costs are:. Utilities.. Insurance.. Office supplies.. Travel.. Advertising expenses.. Accounting and legal expenses.. Salaries and wages.. |
