overhead

s
 MEANING
• Cost s can be divid ed in to t wo
port ions
2. DIR ECT C OS T
3. IN DIR EC T COST
• Dire ct cost s in clu des d ire ct
materia ls , d ire ct la bor a nd oth er
dir ect expenses. Total o f th ese 3
is PRIME COST
• In direct c osts a re in dire ct
materia ls , in direct l abor a nd
in dire ct e xpenses.
Total o f th ese 3 is OVER HE ADS
 CLASSIFICATION OF
COSTS
• Costs are classified as follows
2. Based on functions ( Production,
Administration, Selling,
Distribution& R & D overheads)
3. Based on Elements ( Indirect
materials, Labor, Expenses)
4. Based on the behavior ( Fixed,
Variable, Semi- variable
expenses)
 Classification based on
Functions
• Prodn or Mfg or Works overheads
These are expenses relating to production which are over and above
the Prime cost. Expenses like cotton waste, oil, grease, foremen
salaries, rent, depreciation, repairs, lighting etc
• Administrative overheads
include expenses like office rent, office salaries, printing &
stationery, telephone bill, insurance and other expenses relating to
office.
• Selling overheads
include expenses to promote sales. It includes salesmen’s salary,
commission, advertising, promotional expenses like free samples,
show room expenses, traveling expenses, after sales service etc.
• Distribution overheads
includes all expenses that a finished product undergoes till it
reaches the customer. Eg, packing cost, carriage outward,
warehouse insurance, loss of stock or damage in transit
• R&D Overheads
salary for R & D Staff, lab staff, cost of experiments, subscription to
research journals.
 Classification based on
Elements
• Classified as indirect materials, indirect labor and
indirect expenses
• IN DIRE CT EXP ENS ES
indirect materials are those which do not form part of
the product or service, even if they form a part of the
product, if the value is negligible, they are to be
treated as indirect materials eg, nails in the table,
cotton waste, oil, grease etc
• IN DIRE CT LA BOR
salary to foreman, store keeper, salary to maintenance
people, trainees etc
• IN DIRE CT EXP ENS ES
Are expenses which cannot be directly allocated to
any cost center. Eg, GM’s salary cannot be charged
to any particular dept. it is apportioned in some
ratio based on time spent. Other expenses are rent,
lighting, insurance etc
Cl ass ifi cation bas ed
on behavi or
• Some expenses vary directly with
level of output, some other expenses
will remain same, and some other
expenses will partly vary and partly
remain fixed. Based on this behavior,
expenses may be classified as
2. FIXED OVERHEADS (FIXED)
3. VARIABLE OVERHEADS (VARY
DIRECTLY)
4. SEMI VARIABLE OH ( PARTLY FIXED
& PARTLY VARIABLE)