Factory cargo

The factory load are all those costs that a certain production center must incur in order to achieve its previously agreed objectives. These expenses are indirect expenses, since they depend on the volume of production raised.

Factory cargo

The factory load, in other words, are all those costs that a company or a production center must face in order to achieve the production objectives set by it. In this sense, the manufacturing load is nothing more than the manufacturing expenses that a company owns. In other words, we are talking about an indirect cost, since the volume of this load depends on how the objectives have been set, as well as the level of production to which the company is subjected.

The manufacturing load represents all the disbursements incurred during the production process. Therefore, these can be attributed to the different production units.

Direct labor, as well as the direct material itself, are not considered factory load, since they cannot be attributed to certain production units.

Characteristics of the factory load

As we said, the factory load brings together all those costs that, being essential for the production of the center, are generated indirectly for the company. We must remember, worth the redundancy, that these costs are indirect is due to the fact that they are directly linked to the volume of production. Thus, when we increase a marginal unit, there is an associated expense.

For this reason, the main characteristics of the factory load are:

  • The accounts show heterogeneity.
  • It is made up of a great diversity of articles.
  • Its association with the good that is produced is not necessary.
  • It should be allocated to production on an estimated basis.
  • It has a diversity of behavior at different levels of production.

In summary, these are the characteristics that represent this type of load. However, they should not be the only ones. In other words, this relationship could be expanded, depending on each case.

What costs does the factory load integrate?

Among the costs included in the manufacturing load, we must separate very well those that are direct costs, as well as those that are indirect. This specifies in its definition what type of costs should be associated with this calculation.

In Economipedia we have compiled those that make up this computation, which we mention below:

  • Indirect labor.
  • Indirect raw material.
  • Other indirect costs.

The main difference that determines whether a cost computes the manufacturing load is whether it can be objectively attributed to the production unit, which only happens with direct costs.

Types of factory cargo

Depending on the production that the company has, as well as it has raised, there are several types of cargo. Therefore, depending on these costs that are linked to production, we can classify the manufacturing load into three types:

  • Fixed: Costs remain constant, even in the face of production variations.
  • Variable: Costs vary, depending mainly on the production volume of the center.
  • Mixed: It consists of a fixed part, as well as another variable.

These aforementioned categories also each include a series of subcategories. However, those mentioned above represent the three main types.

How is the predetermined factory charge rate obtained?

Once we have estimated the production level budgeted by the company, as well as the calculation of indirect manufacturing costs, we must proceed to calculate the predetermined rate of the factory load.

This rate can be calculated based on a list of budgeted items:

  • Hours of direct labor.
  • Direct labor cost.
  • Direct material cost.
  • Production units.
  • Hours of direct labor.
  • Machine hours.
  • Prime cost.

Thus, the formula to find the predetermined rate is the following:

TP = CIFp / BP

Where:

  • TP = Default rate.
  • CIFp = Indirect manufacturing costs.
  • BP = Budgeted Base.

In this sense, with this formula and basing it on one of the elements mentioned above, we can obtain the predetermined factory load rate based on the element we want. To do this, we have made an example in the next section to finish understanding it.

Example

In the following example we are going to extract the predetermined rate of factory load, choosing as a base the units produced. For this, we have the following data:

  • Sales budget: 500 units.
  • Initial inventory: 100 units.
  • Final desired inventory: 50 units.
  • Indirect manufacturing cost estimated: $ 50,000 dollars.

Now we proceed to the calculation to extract the total units that we must produce. To do this, we must make the following formula:

Total Units = (Sales Budget – Beginning Inventory) + Desired Ending Inventory

Applying this formula we would obtain the following:

(500 – 100) + 50 = 450 units.

Once we have the units that we must produce, we must carry out the following formula to be able to attribute the indirect cost of manufacturing each of these units.

Indirect unit manufacturing cost = (Estimated indirect cost / Total units)

Thus, applying the formula we would obtain the following unit indirect cost:

TP = CIFp / BP = 50,000 / 450 = $ 111.1 dollars.

This amount of $ 111.1 is the default factory charge rate.