One of the components of factory overhead is

In manufacturing accounting, the total cost of production is built up from three elements: direct materials, direct labour, and factory overheads. Factory overhead consists of all indirect costs of running the factory, costs that cannot be traced to a specific unit of production but are still necessary to keep the factory operating.

Raw materials consumed and manufacturing wages are direct costs. They can be traced straight to the units produced, raw materials become part of the physical product, and manufacturing wages are paid to workers directly engaged in making it, so both are charged as prime cost rather than overhead. Carriage inwards is the cost of transporting purchased raw materials to the factory; it is added to the cost of the materials themselves, making it part of direct material cost, not overhead.

Depreciation of plant and machinery, however, is an indirect cost. It reflects the wearing out of factory equipment generally, and cannot be linked to any single unit produced, it is incurred simply by running the factory over time. This makes it a classic example of factory overhead, alongside items such as factory rent, indirect factory wages, and factory power.

Examination tip: to identify factory overhead, ask whether a cost can be traced to a specific unit made (direct cost) or is incurred generally to keep the factory running (overhead); depreciation of equipment always falls into the second group.