Overheads are business costs that cannot be traced to a specific activity and instead support overall revenue generation. There are various ways to classify overheads, including by function (e.g. manufacturing, selling), behavior (e.g. fixed, variable), element (e.g. materials, labor), controllability, and normality. Overheads are departmentalized by allocating expenses to cost centers like manufacturing or service departments. Primary distribution allocates overhead to departments, while secondary distribution reapportions service department expenses among production departments. Total overhead costs are then absorbed into the output of each production department.

1. SRM INSTITUTE OF SCIENCE AND TECHNOLOGY
DEPT OF COMMERCE
UCM18501 COST ACCOUNTING I
UNIT V OVERHEADS

2. OVERHEADS
Overheads are business costs that are related to the day-to-day running of the
business. Unlike operating expenses, overheads cannot be traced to a specific cost
unit or business activity. Instead, they support the overall revenue-generating
activities of the business.
CLASSIFICATION OF OVERHEADS COSTS:
1, FUNCTION-WISE CLASSIFICATION
(a) Factory or Manufacturing or Production Overhead
(b) Office and Administration Overhead
(c) Selling and Distribution Overhead
(d) Research and Development cost

3. 2, BEHAVIOUR-WISE CLASSIFICATION:
(a) Variable overhead;
(b) Fixed overhead;
(c) Semi-variable overhead.
3, ELEMENT – WISE CLASSIFICATION:
(a) Indirect Material
(b) Indirect Labour
(c) Indirect Expenses
4, CONTROL WISE CLASSIFICATION:
(a) Controllable Costs
(b) UnControllable Costs
5, CLASSIFICATION OF OVERHEADS BASED ON NORMALITY:
(a) Normal Overheads
(b) Abnormal Overheads

4. DEPARTMENTALISATION OF OVERHEADS:
When all the items are collected properly under suitable account headings, the next step is
allocation and apportionment of such expenses to cost centres. This is also known as
departmentalisation of overhead. Departmentalisation of production overheads is the
process of identifying production overhead expenses with different production/service
departments or cost centres. It is done by means of allocation and apportionment of
overheads among various departments.
TYPES OF DEPARTMENTS:
(a) Manufacturing or producing departments
(b) Service departments
(c) Partly producing departments.

7. PRIMARY DISTRIBUTION OF OVERHEAD:
Primary Distribution is the allocation or appointment of different items of overhead to both production and
service departments on suitable basis. There is no partiality between production and service department in
making primary distribution.
SECONDARY DISTRIBUTION
secondary distribution is the reapportionment of service department expenses among the production
departments after completion of primary distribution. While making secondary distribution, some common
bases of apportionment are taken.

8. ABSORPTION OVERHEAD:
The process of charging the total overheads of production departments to the output of
that department is called overhead absorption.