COST AND MANAGEMENT ACCOUNTING

MODULE 3

OVERHEAD COST
According to the CIMA, London, An aggregate of indirect materials,
indirect wages and indirect expenses
Example :- For material O/H - thread, screw, bolt, glue etc
For labour O/H salaries of factory, superintendent,
supervisor, and foremen salary, storekeeper, cleaner, inspector, peon.
For Indirect expenses depreciation and maintenance
power and fuel, lighting and heating, idle time [payments, fringe
benefits etc

DIRECT MATERIAL

DIRECT COST DIRECT LABOUR

PRIME COST

DIRECT EXPENSES

TOTAL COST

INDIRECT MATERIAL

INDIRECT COST INDIRECT LABOUR

OVERHEADS

INDIRECT EXPENSES

Scope in OVERHEAD DISTRIBUTION

1. Collection of overhead
2. Classification of overhead
3. Allocation and apportionment of overhead
4. Re-apportionment of Service Dept Costs
5. Absorption of overhead by production units

PROCEDURE FOR ACCOUNTING AND CONTROLLING OF OVERHEADS:

The cost classification is the process of grouping costs according to
their common characteristics and establishing a series of special
groups according to which costs are classified. There are 2 steps:-
- The determination of the class or groups in which the overhead
costs are subdivided
 - The actual process of classification of the various items of
expenses into one or the other of the groups
The classifications are:-
1. Functional classifications
2. Classification with regard to behavior of the expense
3. Element wise classification
4. Classification according to nature of expenditure

FUNCTIONAL CLASSIFICATION OF OVERHEAD:-

- Factory O/H
- Office and administrative O/H
- Selling O/H
- Marketing O/H

Factory O/H
It consists of all expenditure except direct materials and direct labour

Office and Administration O/H

These include all expense incurred in the performance of management
functions like planning, decision making and controlling.

Selling O/H
Transport, advertisement. Other promotional expenditures

Marketing O/H
These are the marketing expenditure. These create and stimulate
demand.
Eg:- salaries, commissions of salesman, traveling exps of sales
community, advertisement, catalogues, price list etc, rent, rates,
insurance etc, collection of charges and bad-debts