Overhead S

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)

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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

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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)