Final answer:
Factory overhead includes all manufacturing costs, except direct materials and labor. It covers indirect labor and materials, as well as other costs like rent and utilities. Understanding overhead costs is crucial for calculating a firm's economic profit.
Step-by-step explanation:
Factory overhead includes all manufacturing costs, except direct materials and labor. This would encompass indirect labor, which are labor costs not directly tied to the production of a specific product, and indirect materials, which are not directly consumable in the manufacturing of a product. Factory overhead also consists of expenses such as utilities, rent for the factory space, depreciation on equipment, and any other cost involved in maintaining the factory operations that do not directly tie back to a physical product being made.
When a company calculates its total production costs, it is essential to factor in both explicit and implicit costs. Explicit costs are those out-of-pocket expenses, such as payments for wages, rent, or materials. Meanwhile, implicit costs include the opportunity cost of resources already owned by the firm used in business. Understanding these costs helps a firm to calculate economic profit, which is the total revenues minus both explicit and implicit costs.