Overhead Cost Analysis

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1.2.1. Introduction to Overheads In this era of industrial revolution, most of the companies are engaged in mass production. For this, every company needs resources, such as machinery and equipment, and personnel like supervisors and accountants. This does not impact direct expenses, but incredibly increases indirect expenses which are necessary to control. These expenses are called overheads. In this chapter, we will study about overheads in detail. (i) Meaning Overheads are the ongoing operational expenses incurred by an organisation. These expenses are not incurred on any revenue-generating activities, but to operate general corporate functions. Overhead is also known as indirect cost. Examples of overhead expenses include accounting,…show more content…
Their share can increase considerably and burden the company. Overhead costs are fixed costs, that is, they do not increase or decrease directly with the cost of goods sold. Definitions: CIMA, London, defines overhead as “expenditure on labour, materials or services that cannot be economically identified with a specific saleable cost unit”. According to Wheldon, overhead may be defined as "the cost of indirect material, indirect labour and such other expenses including services as cannot conveniently be charged to a specific unit." Blocker and WeItmer define overhead as "Overhead costs are operating cost of a business enterprise which cannot be traced directly to a particular unit of output. Further, such costs are invisible or…show more content…
Production overhead is also known as manufacturing overhead, works overhead or factory overhead. It is incurred on the activities related to production of good and services. Examples of production overhead include: • Indirect materials: Grease, lubricating oil, loose tools, postages and stationeries. • Indirect labour: Salary of factory supervisor, works manager and storekeeper. • Indirect expenses: Factory rent, factory lighting, repairs and maintenance, depreciation of factory building and machines. Administration Overhead Administrative or office overheads are the expenses incurred on formulation of policy, directing the organisation, and control and management of affairs. Office overheads are necessary for effective operation of business. They are the aggregate of indirect materials, indirect labour and indirect expenses. Examples of administrative overhead include: • Indirect materials: Printing and stationary, cleaning materials and water containers. • Indirect labour: Salary of managing director, accountants and secretary. • Indirect expenses: Office rent, lighting, repairs and maintenance, depreciation of office building and furniture, legal and bank charges. Selling

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