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Understanding Overheads and Depreciation

The document discusses overhead costs, which are fixed business expenses not directly tied to production levels, and their importance in budgeting and costing analysis. It highlights the different types of overheads, their role in determining the actual production costs, and how they are reported in financial statements. Additionally, it touches on the calculation of depreciation and the useful life of assets.

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vishvavijay2020
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45 views27 pages

Understanding Overheads and Depreciation

The document discusses overhead costs, which are fixed business expenses not directly tied to production levels, and their importance in budgeting and costing analysis. It highlights the different types of overheads, their role in determining the actual production costs, and how they are reported in financial statements. Additionally, it touches on the calculation of depreciation and the useful life of assets.

Uploaded by

vishvavijay2020
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

UNIT-3

OVERHEADS AND DEPRECIATION

Introduction:
Overhead refers to a business expense which remains fixed in nature. Overheads do
not increase or decrease with an increase or decrease in the production or manufacturing of
goods or provision of services.
It is important to determine the overhead costs while drawing up the budget of an
organisation. Inclusion of overhead helps determine the actual cost of production of the
products.

UNDERSTANDING OVERHEAD :

The expenses incurred on overheads are ongoing in nature but do not include the
costs directly associated with the production of a product. some times, the overhead costs
may be variable or fixed or semi-variable in nature.

Overheads are essential to keep the factory place, maintain the security of the
premises, salaries for the administrative staff and other administration expenses.

Overhead costs are reported separately in costing statements to do a costing analysis.


Costing statements help understand the contribution of various costs to the production cost
of a product.

While arriving at the profit or loss of an organisation, overhead costs are included in
the general or specific expense heads, such as building rent, insurance expense on the
building, machinery, staff, etc.
Total Overhead cost
100
Total Direct material cost
Total Overhead cost
100
Total Direct material cost
60000
100
240000

Total Overhead cost


100
Total Direct labour cost
Total Overhead cost 4000
100 100
Total Direct labour cost 12000

Total Overhead cost


100
Total prime cost
Total Overhead cost
100
Total prime cost

Total Overhead cost


Total production man - hours spent
Total Overhead cost
Direct labour hours for budget period
Total overhead
Number of total man hours put
Total overhead
regular man hours + overtime man hours
20000
(25 8 30 150)
Total overhead
Total productive machine hours

m2
m2
Total overheads
Quantity of production

m2
Total overhead assigned to a department
Total area of the production department in sqaure metre
(Cost – Residual Value)
Useful Life
Originalcost of asset Scrap value
Estimeted life of an asset
( 33,000 3,000)
10
Remaining Life of the Asset (Including current year)
Sum of all the digits of the life of the assests in years

Remaining Life of the Asset (Including current year)


Sum of all the digits of the life of the assests in years

3 3
20,000 20,000
1 2 3 6
2
20,000
6
1
20,000
6
Value of Work Certified as complete
100
Total Expected Production or Usage
Cost of Mines
Estimated Minerals to be Extracted
ww
w.E
asy
Engi
nee
rin
g.n
et

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