All costs incurred in the factory that are not direct materials or direct labor are generally termed as

factory overhead. One method to determine whether a factory expenditure is a factory overhead item is
to compare it to the classification standard established for direct materials and direct labor costs. If the
expenditure cannot be charged to either of these two “direct” factory accounts, it is classified as factory
overhead. Factory overhead refers to the cost pool used to accumulate all indirect manufacturing costs.
Examples of factory overhead include the following:

Need for Standards Precise measurement requires standards. A standard is understood to be a rule of
measurement by auth'.ority~ It is like a norm. Whatever is considered normal con be generally accepted
as standard. Management, in assigning responsibility for the actual results of operations . wants to know
that those results were measured accurately.. But before there con be a fair judgment concerning good
or poor performance, the measure of acceptable performance - a standard - must be applied to actual
r~sults . . A stand<;ird cost. therefore, is a scientifically predetermined cost of manufacturing a unit or a
specific quantity of product during a particular period of time. !t is a measure of acceptable
performance, estab/ishe,d by management as a guide to certain economic decisions. It is in short, a
reflection of what a management thinks a cost ought to be. Standards are most frequently established
for: 1 . Raw materials used in making a product or one of its components. 2. Direct labor needed to
perform manufacturing opera!ions . 3. Manufacturing overhead applied to a unit of outpul . Standard
costs also have ·an important qualitative dimension·. For the moment, it will be assumed that a standard
cost reflects the desired level of achievement with operating objectives. However, standards cannot be
defined on any precise scale that reflects different degrees of success in achieving goals. As will be seen,
acc.ou·nting standards mav be described variously as ideal, practical, tight, tight, loose, attainable, or
current. Usefulness of Standard Costs A standard· cost system may be used in connection with either the
process or job order cost accumulation methods. Standard cost is most readily odbptoble to
manufacturing environments, where production technology is relatively stable and the products
manufactured are homogenous within the cost accumulation unit, i.e., the department or the job.
Standard cost systems aid in planning and controlling operations and in gaining insights into the
probable impact of managerial decisions on costs and profits. Standard costs are used for: 1. Establishing
budgets 2. Cost control (management by exception} 3. Price setting 4. Cost awareness The Standard Cost
Accounting System The standard cost accounting system consists of three basic objectij,es, they are: l .
Standard setting 2. Accumulation of actual costs 3 . . Varian.ce analysis, the difference between the
actual costs incurred (2), and the standard ,setting. · · Development of Standards . \ . ' Developing
standards can be rather large or detailed task, depending on the size of the company · or segment and
the complexity and diversity of the produd design and manufacturing operations. Before stcinqards can
be developed, a thorough understanding is needed for these things: l . The fundamental factor of cost.
2. The design and material specifications of the product. 3. The nature of productive labor operations
and their departmental locations. Who Set Standards ? · ,Standards is to be set by duly constituted
authority. In a small and medium-sized companies, this authority would mean, fop management. In
large companies, ii is likely to be the general manager of a division or a branch plant. It is seldom
possible for busy top executives such as these to participate ~irectly, in the establishment of standards.