In a business, of course there are some operational costs . Factory overhead costs (BOP) is one of them.
Even though they play a role in business operations, these costs are not directly related to the production process.
So, what is meant by factory overhead?
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Definition of Factory Overhead Cost (BOP)
Factory overhead costs are a type of expenditure that is not directly related to the production process of goods or services.
Generally, these costs are owned by each company and come from the production support division within the company.
Examples of factory overhead costs, such as costs for additional facilities in the production process, insurance costs, taxes and much more.
Even though it is not directly related to production, the business can continue to operate, one of which is with this cost.
Therefore, BOP must still be budgeted by each company.
Factory Overhead Cost Grouping
Every company or factory, of course, has a business budget plan. Preparing a budget is easier and more automatic using the rab application.
To facilitate the process, one way is to classify overhead costs.
Overhead costs are grouped into three different parts with various constituent elements. The following are the elements of factory overhead costs in each group.
1. By Nature
Overhead costs in a factory or company, according to their nature are divided into three different elements, namely:
- Cost of supporting or auxiliary materials. That is, this material is not a result of production or a material whose value is less than the price of the entire product
- Costs for indirect labor, namely labor whose nominal wages cannot be calculated directly from production results
- Care/maintenance costs, such as the cost of repairing production equipment, vehicle repairs or the cost of purchasing spare parts.
2. According to Behavior as a result of Changes in Output/Production Volume
In this group there are also three constituent elements in it, including:
- Fixed BOP, the type of BOP that is not affected by the volume of output/production. Examples include legal consultant fees, rent, insurance and fixed asset depreciation .
- Variable BOP, namely the type of cost also changes according to changes in the amount of production. The amount of production, of course, also affects the quantity of stock supply in stock applications and warehouse applications . Changes in the amount of production from the example of variable overhead costs is the marketing budget.
- Semi-variable BOP, costs that also change but are not proportional to changes in output volume. For example, the cost of purchasing printer ink.
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3. According to the Department in the Company
For this third group, there are only two elements in it, namely:
- Direct departmental BOP, i.e. the costs are owned by a department and the benefits are only felt by that department
- Indirect departmental BOP, namely costs that benefit the department and other departments.
Benefit from Factory Overhead Costs (BOP)
Although factory overhead costs will be different in each business sector, they will have benefits that are broadly the same.
The following are some of the benefits you can get.
1. Provide Detailed Information on Cost Allocation
Through BOP, you can obtain detailed information regarding the allocation of costs incurred by the company.
That way you can plan your budget more precisely, while simultaneously reducing or eliminating excessive spending.
2. Manage and Oversee Expenses
With this BOP, it allows the company to manage and oversee the company’s expenses as a whole.
From there it will be easier for you to identify if there are costs that are too large and make adjustments.
You can also manage expenses in a more organized and according to plan, especially when using online accounting software .
3. Facilitate Product Pricing
BOP is enough to influence the pricing of a product. Even though it is not directly related to production, the existence of BOP must still be considered.
You will experience a loss when the BOP is still issued but is not included in the product price calculation.
Therefore one of the benefits of BOP is more precise product pricing.
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How to Calculate Factory Overhead Cost (BOP)
To be able to implement BOP in your business, it is not enough just to understand the meaning, the components as well as the benefits.
Another thing that is no less important to understand is how to calculate factory overhead costs. Here are the ways to calculate it.
1. Separate Budgets for Each Division
The first way to calculate BOP is by separating the budget of each division or department within the company.
In practice, you must collect information related to the estimated cost of each division and then analyze the overhead cost submission for each.
2. Make Total Estimated BOP
The second method is to collect all BOP from each division within the company to be analyzed at once.
That way you can determine the budget budget for the total BOP. Generally this authority lies with the finance department or the owner of the company.
3. Calculating BOP Percentage
The third or last way of calculating is by finding the percentage of BOP needs in each division and dividing it according to need.
When compared with the two previous calculation methods, this last method is the most commonly used today.
The reason is because it is simpler and faster. You just need the overall BOP, divided by the total cost of production and multiplied by 100%.
From this percentage, it is then divided again for each division according to its needs. Generally the marketing division gets the biggest BOP budget.
This is due to their obligation to expand product marketing, requiring a sizable budget.
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Function of Factory Overhead Cost (BOP)
After understanding how to calculate it, you also need to know what is the important function of calculating BOP for a company.
What are the functions? Here is a short review.
- Reference budget estimates for each division, this is to facilitate the company’s financial analysis and make adjustments to the budget plan
- Managing expenses outside of production, the company’s financial flows must always be monitored. In addition to minimizing errors also avoid cheating.
BOP is a cost that is prone to abuse, therefore it must be managed properly by the authorities. - Increase the effectiveness and efficiency of the use of BOP. By calculating BOP, it will be easier for the finance division to determine priority BOP.
- Become the basis for determining future business strategy. This can happen when there is product research activity or market analysis.
The costs for these activities of course come from the BOP. That way indirectly BOP can also be used as the basis for business strategy in the future.
So even though it is not directly related to the production process, it does not mean that BOP is not as important as other types of costs.
Because of this cost, there are many important functions and benefits that you can get. Understand and apply BOP in business, to ensure smooth running.
As explained above, that factory overhead costs are factory expenses that are not directly related to the production process.
However, that does not mean that because it is not directly related, it is not included in the calculation of the selling price of the product.
Precisely with BOP, you can determine the most appropriate price for the product so you don’t experience a loss.
This is because there is a fixed BOP that is issued regardless of output or production volume.
If these costs are not included in calculating the selling price, of course, in the end you will experience a loss.