What do you mean by overheads?

Describe different type of

overheads.
In simple terms, overhead is the cost of keeping your business afloat. Overhead is a
summary of the costs you pay to keep your company running, and appears on your
monthly income statement.

When you track and categorize your overhead, you can plan around expenses, get an
accurate picture of your profit margin, and find new ways to save your business money.
Example of overheads is:

 Property taxes
 Rent
 Utilities
 Accounting and legal expenses
 Administrative salaries
 Insurance
 Depreciation
 Licenses and government fees

 1. Fixed overheads
 Fixed overheads are costs that remain constant every month and do
not change with changes in business activity levels. Examples of
fixed overheads include salaries, rent, property taxes, depreciation
of assets, and government licenses.
  
 2. Variable overheads
 Variable overheads are expenses that vary with business activity
levels, and they can increase or decrease with different levels of
 business activity. During high levels of business activity, the
expenses will increase, but with reduced business activities, the
overheads will substantially decline or even be eliminated.
 Examples of variable overheads include shipping costs, office
supplies, advertising and marketing costs, consultancy service
charges, legal expenses, as well as maintenance and repair of
equipment.

 3. Semi-variable overheads
 Semi-variable overheads possess some of the characteristics of both
fixed and variable costs. A business may incur such costs at any
time, even though the exact cost will fluctuate depending on the
business activity level. A semi-variable overhead may come with a
base rate that the company must pay at any activity level, plus a
variable cost that is determined by the level of usage.
 Examples of semi-variable overheads include sales commissions,
vehicle usage, and some utilities such as power and water costs that
have a fixed charge plus an additional cost based on the usage.
  

Describe job costing, batch costing , process costing and service

costing in detail
Job costing as a distinctive method costing is a form of specific order costing
which is adopted to execute the work strictly according to customer’s specification.
The production process depends upon the member of orders received from
customers. As such production is not standardised and intermittent in nature. The
goods manufactured are not for stocking but for immediate delivery once it is
complete in all respects.

The cost is ascertained separately for each job as every work order differs from
customers to customers. The purpose of job costing is to ascertain the profit or loss
made on each job. Further cost of job is compared with the estimated cost to
indicate whether estimation was defective or the actual cost incurred is excessive.
Such an analysis helps in taking remedial action to improve efficiency and also
facilitate revision of estimates.

Features of job costing

 Using job costing, the cost of each job is ascertained separately. This, in
turn, helps in finding out the profit or loss on each job.
 It enables management to detect those jobs which are more profitable and
unprofitable ones.
 Job costing provides the base for determining the cost of similar jobs to be
undertaken in future as a part of future planning.
 Helps in managing and controlling costs, by comparing the actual costs with
the estimated cost. In short, the calculation of variances.

Batch costing is another form of job costing. Under this method,

homogeneous products are taken as cost unit. A batch consists of a specific
number of products or units or articles. The number varies from one batch to
another. Hence, batch cost is used to determine the cost per unit or article
per unit.

The company may want to get lower cost of production. If so, the cost per
unit will also be low. For which, the company has to work out Economic
Batch Quantity in the line of Economic Order Quantity. The cost procedure
in batch costing is very similar to job costing. Hence, production order
number is allotted to each batch.

Following factor are considered to determine economic batch quantity

1) Setting up Cost per batch.

2) Cost of production per unit.

3) Storage or inventory Cost per unit.

4) Rate of Interest on the Capital employed in the products

5) Annual Demand for the product.

 Features of batch costing

i. Costs are collected batch-wise – A batch number is allocated to each batch and
costs are accumulated for each batch.

ii. Products of identical nature – Items which are produced in a batch are identical
or similar in nature.

iii. Convenient group – It is possible to classify items into convenient groups for
the purpose of costing.

CIMA defines Process Costing as “the costing method applicable where goods
or services result from a sequence of continuous or repetitive operations or
processes, costs are averaged over the units produced during the period.”
Process Costing is used where the production moves from one process or
department to the next until its final completion and there is a continuous mass
production of identical units through a series of processing operations. It is applied
for various industries like chemicals and drugs, oil refining, food processing, paints
and varnish, plastics, soaps, textiles, paper etc.

Features of process costing

1. The production is continuous

2. The product is homogeneous
3. The process is standardized
4. The output of one process becomes the raw material of another process
5. The output of the last process is transferred to finished stock
6. Costs are collected process-wise
7. Both direct and indirect costs are accumulated in each process

Service costing refers to the costing procedure used for determining the cost
per unit of service rendered. The term service costing is defined as the cost
of specific services and function. For example- maintenance, personnel.
Canteen etc. These may be called as services department, centers, or
functions. Service costing is a method to calculate the cost of services. At
the end of the specified period, the cost of operating a service Centre
grouped under suitable headings. To find out the cost per unit of services,
the department divided the aggregate expenditure by the quantity of services
rendered during a specified period. The cost is classified into the variable
and fixed cost. Under the service costing, costs are ascertained at the end of
the specified period. The main features of operating costing are as following:
(1) The undertaking which adopts service costing does not produce any
tangible goods. These undertakings render unique services to their
customers.
(2) The expenses are divided into fixed and variable cost. Such a
classification is necessary to ascertain the cost of service and the unit cost of
service.
(3) The cost unit may be simple or composite. The examples of simple cost
units are cost per unit in electricity supply, cost per liter in water supply, cost
per meal in canteen etc. Similarly cost per passenger kilometers in transport
cost per patient-day in hospital, costs per room-day in hotel etc. are the
examples of composite cost unit. (4) Total cost is averaged over the total
amount of service rendered.
(5) Costs are usually computed period-wise. However, in the case of
utilization of vehicles, use of road-rollers etc., the costs are computed order
wise