This document defines overheads as indirect costs of operating a business, such as rent, utilities, marketing, and administration. It provides examples of overhead items and discusses how overheads are classified based on their function, behavioral characteristics, elements, and controllability. The document also covers the processes of collecting, allocating, apportioning, and absorbing overheads to determine the accurate cost of products or services.
2. OVERHEADS-DEFINITION
The indirect costs or fixed expenses of operating
a business (that is costs not directly related to the
manufacture of a product or delivery of a service)
that range from rent to administrative costs to
marketing costs
It is an indirect or invisible part of producing a
product or service
3. EXAMPLES OF OVERHEADS
oEnergy/Utility Costs
oLoan Interest
oDepreciation
oMarketing/Sales Expenses
oAdministrative Expenses
oRent Expenses (Property and Equipment)
oSubcontractors (where costs are fixed)
oTransportation Expenses
4. FEATURES OF OVERHEADS
Indirect costs
Common costs
Comprise of cash expenses(rent) and book
expenses(depreciation)
Includes both production and non-production
expenses
Both fixed and variable
5. COLLECTION OF OVERHEADS
The collection of overhead is the process of
recording each item of cost in the book of accounts
maintained for the purpose of ascertainment of cost
of each cost center or cost unit
The items of overhead may be collected from the
following documents:
13. CONTROLLABILITY
1. CONTROLLABLE OVERHEAD
Includes consumable materials, power expenses, lighting
expenses, etc.
2. UNCONTROLLABLE OVERHEAD
Includes fixed overhead cost like rent, salaries, legal
fees, etc.
14. ALLOCATON OF OVERHEAD
Overheads are the common expenses incurred for a number
of departments and cost centers or cost units. Certain items
of overheads can be directly identified with a particular
department or cost center.
“The process of charging such items of overhead to a
particular department or cost center is known as allocation of
overhead”
For example, repairs and maintenance for a machine should
be charged or allocated to that department where the
machine is installed
15. ALLOCATION- CONT…
Features
• It helps to determine the product cost
• It helps to fix the price of a product
• It helps to measure the effectiveness of a particular
department or cost center
• It helps to supply the cost information to the management
• It can be used to control wastage and defective
• It helps to make accurate pricing for the competitive market
• It helps to provide cost information for planning, controlling
and managerial decision making
16. APPORTIONMENT OF OVERHEAD
There are certain overheads, which are common to a number of
departments or cost centers. They cannot be directly identified or
allocated to a particular department or cost center
The distribution of such overhead to several departments or cost
centers proportionately on some equitable basis is known as
Apportionment of overheads
For example, salary paid to the general manager should be
distributed to the production, administration and selling
departments as the general manager looks after all the
departments. Some other common expenses are electricity, rent,
lighting, etc.
17. APPORTIONMENT- CONT…
Apportionment of overhead is made on the basis of:
•Benefits or services received
•Capacity to bear cost
•Efficiency achieved
•Analysis and research
18. ABSORPTION OF OVERHEAD
It is the process of sharing of overheads by all
products or jobs of the department
To determine the amount of overhead share by the
product or job of a particular department, the
overhead absorption rate or overhead rate should be
found out. There are several methods of absorption
of overhead
The two common methods are :
19. ABSORPTION- CONT…
On the basis of labour hour rate:
Overhead rate per Total overheads
labour hour Total labour hours
On the basis of machine hour rate:
Overhead rate per Total overheads
machine hour Total machine hours