Overhead Costs

Definition
Examples
Calculation

Manal Abdullah Altaher

 OVERHEAD COSTS
Overhead cost are those cost that is not related directly on the
production activity and are therefore considered as indirect
costs that have to be paid even if there is no production
ADVANTAGES
OVERHEAD COSTS
Overhead Cost refers to the cost of indirect material, indirect labor
and other operating expenses
Associated with the typical day to day running of the business
but cannot be conveniently charged directly to any specific product
or service or cost center
Indirect and need to be shared out among the cost units as
precisely as possible.
It is vital for a business to keep a close watch on this
cost, and efforts should be made to keep it low as that
provides the business with the ability to price its
products more efficiently so that it remains
competitively superior to its competitors.
Calculation
Example of
Overhead Costs
 Product JM is prepared, and it incurs a lot of overhead costs
The production head gives the details as per below

Rent of Production Property: 100,000

Depreciation on Plant & Machinery: 50,000
Depreciation on Office Building: 30,000
Property Taxes on Production Unit: 5,000
Salaries of Production Staff: 75,000

calculate manufacturing overhead based on the above information

NOTE: We shall ignore the depreciation on office building
as it is not incurred indirectly for the production unit
 SOURCES
(www.wallstreetmojo.com)
(www.myaccountingcourse.com)