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à Expenses that cannot be conveniently identified with a specific


product or activity.

à Unlike materials and production labor, overhead is an indirect and


invisible part of producing a product or service.

ÃAll the expenses over and above the prime cost are known as
overhead charges.

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à cne part relates to the product

à cther part relates to facilities and services maintained for running


the organization

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Pith the increasing trend towards plant automation, heavy


expenditure is being incurred which cannot be charged directly to
any particular unit .

Can be called as common cost to all units of production.

cverhead expenses being a significant proportion of total cost


ascertainment and control by function and for guidance in certain
managerial decisions by the extent of the variability with
production.

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Allocation is the process of identification of overheads with cost
center.

Apportionment is the allotment of two or more cost centers of


proportions of the common items of cost on the estimated basis of
benefits received

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Êe-apportionment of cverheads

To ±reapportion the overhead costs of service departments


to production department is called Êe-apportionment of
cverheads

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Element wise classification
Indirect Material cost can be apportioned to cost centers e.g. loose
tools, consumable stores, lubricating oil

Indirect labour cost cannot be allocated but apportioned to cost centers


e.g. salary of foreman, superviser wages of maintenance
department, idle time cost, holiday pay, overtime wages.

Indirect Expenses ± e.g. all administration, selling and distribution


expenses
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Õunction wise classification

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Ã2roduction overhead is the total indirect cost associated with
manufacturing activities, the sequence of which begins with
the procurement of materials and ends with the primary
packing of the product
Õor example,
ÃIndirect materials like lubricants, cotton waste and other
factory supplies
ÃDirect materials of small individual value
ÃPages of indirect workers
ÃÕuel and power
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ÃIt is the total cost of formulating the policy, directing the
organization and controlling the operations of an undertaking
which is not directly related to production, selling,
distribution, research or development activity or function.
Examples:
Ãcffice supplies
Ã2rinting & stationary
ÃSalaries to office staff
Ãcffice rent
Ãcffice lighting charges

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à It refers to expenses associated with the marketing & selling activities
Examples:
à Salaries & commissions of salesmen
à Travelling expenses
à Sales office expenses
à Market research
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It is the total indirect cost associated with the distribution of finished
products
Examples:
2acking charges, salaries and wages of distribution staff

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à 
 - Phich tend to be unaffected by variation in the volume of
output, they remain constant. They are related to periods, and so the fixed costs are
known as the period costs.e.g. the rent of the building or salaries of the office staff

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  Tend to follow the level of activity, the variation may not be
always in the same proportion as the production or sales volume changes, but by the
large there is a linear relationship,between the variable overhead charges ,the cost
of per unit of output tends to remain constant at different levels of output.

e.g. indirect material, indirect labour, power & fuel, lighting and heating expenses

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 - 2artly fixed and partly variable overhead costs

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ÃThe process of charging, the overhead to cost units is called as


absorption of overheads

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cverheads absorbed in the production are more than the actual
overheads incurred, if actual expenses fall short of the amount
absorbed, there is a said to be an over absorption of overheads.

 

2roduction are less than the actual overheads incurred, if actual
expenses exceed the amount of overheads absorbed in the
production, then there is a case of under absorption.

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à Control Energy Costs (Energy Efficient 2roducts)

à Inventory Control (avoid excessive/ wrong inventory items)

à Evaluate Insurance (options, policy changes, agents, etc.)

à Êenegotiate interest terms

à Êenegotiate rental terms

à Decrease working capital

à Implement Quality Control System

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à Êe-evaluate Sales and Marketing Costs

à Study Maintenance Costs

à Decrease Transportation Costs

à Increase Employee Efficiency (cutsourcing, Automation, Task


Consolidation)

à Õocus on 2rofit Margins

à Listen to the Market and Õuture Trends

à Ask Employees for their Suggestions on Êeducing Costs

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