OVERHEADS

Overhead costs are also termed as indirect or

supplementary costs. These are costs which cannot
be wholly debited directly to a particular job. These
are neither direct material nor direct wages nor are
these expenses of direct nature and therefore, these
cannot enter the direct cost of manufacture.
Classification of overheads
According to nature
• Indirect material
•Indirect labour
• Indirect expenses
According to ‘normality
• Normal overheads
•Abnormal overheads

According to controllability
• Controllable
•Uncontrollable

According to variability
• Fixed overheads
• Variable overheads
• Semi variable overheads
According to Function
• Factory O/H

• Administrative O/h

• Selling and distribution o/h

Some of items of factory overheads have been discussed:

• Depreciation on plant and machinery

• Provision for obsolescence

• Cost of defective work

• Expenses on removal and erection of machinery

• Experimental expenses

• Interest on capital

• Research costs

•Development costs

•
Some of items of office overheads have been discussed:
• Indirect material
• indirect labour
• Indirect expenses

Audit fees
Some of items of selling and distribution overheads
have been discussed:
• Selling overheads
• Distribution overheads
• Catalogues and price lists
• Bad debts
• Periodical exhibition expenses
• Market research
• Packaging costs
• discounts and rebates
OVERHEADS DISSTSRSIBUTION STAGES
• Collection and classification of overheads
• Departmentalization of overheads

Allocation
Apportionment
• Absorption of overheads

After the redistribution of service department costs

to the production dept, the process of allotment of
overheads of all the expenses of overheads is to
charge the costs to production department, and then
the total expenses of the production dept are borne
by all the cost units by means of absorption rates.
Methods of absorption of overheads
• Production unit method

Production unit rate =Factory overhead

No. of units produced
• Percentage methods

(i)%of direct material= Factory overheadsX100

Direct material cost
(ii)%of direct material= Factory overheadsX100
Direct labourcost
(iii)%of direct material= Factory overheadsX100
Prime cost
Methods of absorption of overheads
• Hourly rate method

(i)Production unit rate =Factory overhead

direct labour hrs during a period
(i)Production unit rate =Factory overhead
machine hrs during a period
Computation of machine hour rate
Expenses Bases
Standing Charges
Rent and taxes Floor area occupied
Lighting and heating Floor area or number of points plus cost of special
lighting or heating any machine
Supervision According to time spent on each machine
Consumable stores As per stores requisition slip
Insurance Capital value of each machine

Machine expenses

Depreciation (Cost of machine-Scrap value)/Life in terms of

machine hours
Power Horse power each machine
Repair Cost of repairs/Life in terms of machine hours