Meaning and Definition Overheads

Meaning and Defnition Overheads Aggregate of all expenses relating to indirect material cost, indirect labour cost and indirect expenses is known as Overhead. Accordingly, all expenses other than direct material cost, direct wages and direct expenses are referred to as overhead. Accord According ing to Wheldo Wheldon, n, Overhe Overhead ad may be dened dened as "the "the cost cost of indire indirect ct materia material, l, indirect labour and such other expenses including services as cannot conveniently be charged to a specic unit." Importance o Overhead Cost owadays business is a dynamic organism. Advancement of technological development and innovation, economic situations and social considerations are the important factors for modern moderni!a i!atio tion n of indust industries ries at mass mass produc productio tion n to meet its more more demand demand.. he overhead charges are heavily increased and they represent ma#or portion of total cost.  herefore, it assumes assumes greater importance for cost control control and cost reduction. Classifcation o Overheads $lassication of overheads is the process of grouping of costs based on the features and ob#ectives of the business organi!ation. he following are the important methods on which the overheads are classied% &a' On the basis of ature. &b' On the basis of (unction. &c' On the basis of )ariability. &d' On the basis of ormality. &e' On the basis of $ontrol. *. On the basis of ature% One of the important classications is on the basis of nature or elements. +ased on nature the aggregate of all indirect material cost, indirect labour cost and indirect other expenses are known as overheads. Accordingly, overheads are grou groupe ped d into into &a' &a' ndir ndirec ectt -ate -ateri rial al $ost $ost &b' &b' ndi ndire rect ct abou abourr $ost $ost and and &c' &c' ndir ndirec ectt /xpenses. &a' ndirect -aterial $ost% ndirect materials do not form part of the nished products. ndir ndirect ect materia materials ls are are indir indirect ectly ly or general generally ly us used ed for produ producti ction on which which cannot cannot be identi identied ed direct directly ly.. (or (or examp example, le, oil, oil, lubric lubricant ants, s, cotton cotton waste, waste, tools tools for repair repairs s and maintenance etc. are indirect materials. &b' ndirect abour $ost% ndirect labour is for work in general. he importance of the distribution lies in the fact that whereas direct labour can be identied with and charged to the #ob, indirect labour cannot be so charged and has, therefore, to be treated as part of the factory overheads to be included in the cost of production. /xamples are salaries and wages of supervisors, storekeepers, maintenance labour etc. &c' ndirect /xpenses% Any expenses that are not specically incurred for or can be readily charged to or identied with a specic #ob. hese are the expenses incurred in gene genera rall for for more more than than one one cost cost cent centre re.. /xam /xampl ples es of indi indire rect ct expe expens nses es are are rent rent,, insurance, lighting, telephone, stationery expenses 0etc. &1' On the +asis of (unction  he classication overhead on the basis of the various function of the business concern is known known as func functi tion on wise wise over overhe head ads. s. 2ere 2ere ther there e are are four four impor importa tant nt func functi tion onal al overheads such as% &a' 3roduction Overhead &c' 4elling Overhead &b' Administration Overhead &d' 5istribution Overhead &a' &a' 3rod 3roduc ucti tion on Over Overhea head% d% 3rod 3roduc ucti tion on over overhe head ad is also also term termed ed as manu manufa fact ctur urin ing g overhead or works overhead or factory overhead. t is the aggregate of all indirect expenses which are incurred for work in operation or factory. hese costs are normally

incurred during the period when the production process is carried on. (or example, factory rent, factory light, power, factory employees6 salary, oil, lubrication of plant 7 machinery, etc. &b' Administrative Overhead% Administrative expenses are incurred in general for management to discharge its functions of planning organi!ing, controlling, co8ordination and directing. hese expenses are not specically incurred and cannot be identied with the specic #ob. t is also termed as o9ce cost. (or example, o9ce rent, rates, printing, stationery, postage, telegram, legal expenses etc. are the o9ce and administrative costs. &c' 4elling Overheads% 4elling expenses are overheads which are incurred for promoting sales, securing orders, creating demand and retaining customers. (or example, salesmen6s salaries, advertisement, rent and rates of show room, samples, commission etc. &d' 5istribution Overhead% 5istribution overhead are incurred for distribution of products or output from producers to the ultimate consumers. (or example, warehouse sta:  salaries, expenses of delivery van, storage expenses, packing etc. &;' On the +asis of )ariability One of the important classications is on the basis of variability. According to this, the expenses can be grouped into &a' (ixed Overhead &b' )ariable Overhead and &c' 4emi8 )ariable Overhead. &a' (ixed Overhead% (ixed cost or overhead incurred remain constant due to change in the volume output or change in the volume of sales. (or example, rent and rates of  buildings, depreciation of plant, salaries of supervisors etc. &b' )ariable Overhead% )ariable overhead may be dened as "they tend to increase or decrease in total amount with changes in the volume of output or volume of sales." Accordingly the change is in direct proportion to output. ndirect materials, ndirect labour, repair and maintenance, power, fuel, lubricants etc. are examples of variable overhead costs. &c' 4emi8)ariable Overheads% 4emi8variable overheads are incurred with a change in the volume of output or turnover. hey neither remain xed nor do they tend to vary directly with the output. hese costs remain xed upto a certain volume of output but they will vary at other part of activity. 4emi8variable overheads are mixed cost, i.e., partly xed and partly variable. (or example, power, repairs and maintenance, depreciation of plant and machinery telephone etc. &ncontrollable overheads cannot be controlled by the action of the executive heading the responsibility centre. (or example, rent and rates of building cannot be controlled. 3rocedure or 4teps in Overhead Overheads are incurred for work in general. Overhead is added to the prime cost in order to measure the total cost of production or cost of goods sold. (or allocation and apportionment of overhead in the cost of production or cost of goods sold the following procedures are involved% &*' $lassication of Overhead

&1' $ollection of Overhead &;' Overhead Analysis%  &a' 5istribution of overhead to production and service departments, i.e., AllocatiOllnmd Apportionment of overhead to cost centre. &b' ?e8distribution of overhead from service department to production department, i.e., Allocation and Apportionment of service centres to production centres or departments. &