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What is Meaning of Overhead | Classification of Overhead

Meaning of Overhead
Meaning of Overhead

Meaning of Overhead

All material, labour and expenses which cannot be identified with a particular product or job or process are termed as indirect cost.

The three elements of indirect costs viz indirect material, indirect labour and indirect expenses are collectively known as overheads or on costs or burden Overhead cost are also termed as supplementary costs.

These are costs which cannot be wholly debited directly to a particular product. They are neither direct material nor direct wages nor are they expenses of direct nature, and therefore, they cannot enter the cost of manufacture direct.

But they constitute an element of cost as they have been incurred for manufacturing a product or making it ready for sale.

According to C.A. S-3, “Overhead comprise of indirect materials, indirect employee costs, and indirect expenses which are not directly identifiable or allocable to a cost object in an economically feasible way.”

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Overhead may be classified under the following categories:

(1) Factory Overhead

(2) Office Overhead

(3) Selling Overhead

(4) Distribution Overhead

(1) Factory Overhead

Such indirect expenses which are incurred in the factory and are concerned with the running of the factory are known as factory overhead or works overhead or manufacturing overhead or production overhead.

For example

(i) Indirect materials, bolts, nuts, screws, thread, nails, lubricants, rags.

(ii) Indirect or unproductive labour, time keepers salaries, gateman’s salary, watchman and store keepers salaries.

(iii) Gas, steam, power, fuel, coal, water, cleaning, haulage, lighting and heating.

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(iv) Rent, rates, taxes and insurance.

(v) Manager’s or works manager’s salary.

(vi) Factory workers salaries.

(vii) Depreciation, repairs and maintenance.

(viii) Stores overheads.

(ix) Oiling and clean of machines.

(X) Buying expenses.

(xi) Technical director’s fees or remuneration.

(xii) Experimental and research expenses or research and development, expenses.

(xiii) Cost of training to the new employees.

(xiv) Laboratory expenses.

(xv) Pay for holidays.

(xvi) Power house expenses

(xvii) Supervision, inspection and testing fees.

(xviii) Labour office expenses

(xix) Municipal taxes.

(xx) Cost of rectifying of normal defective output.

(xxi) Cost of removal of overburden.

(xxii) Drawing expenses.

(xxiii) Wages for truck driver who handle raw material.

(xxiv) Cold rolling mill expenses.

(xxv) Captive power Rent Expenses.

(xxvi) Gas turbine running cost.

(xxvii) Water treatment plant expenses.

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(2) Office or Administration Overhead

Administrative overhead is the cost incurred in for making policies, planning and controlling the functions and motivating the personnel of an organization towards attainment of its objectives.

In other words, these are indirect expenses incurred in the direction, control and administration of an undertaking Other name is office on cost, administration on cost, establishment overheads, establishment on cost Examples of administration overhead are-

(i) Printing and stationary used in the office.

(ii) Cost of dusters, brushes etc. for cleaning..

(iii) Administrative and office salaries including director fees orn remuneration.

(vi) Office rent, rates, insurance.

(v) Office lighting, heating and cleaning.

(vi) Depreciation and repairs of office buildings, furniture and fittings.

(vii) Legal charges. bank charges, audit fee, postage, telephone.

(viii) Trade subscriptions or Trade Magazine.

(ix) General expenses.

(x) Subscriptions for trade journals.

(xi) Counting expenses or counting expenses.

(xii) Hire of accounting machines.

(xiii) Telephone rental plus metered calls.

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(3) Selling Overhead

These constitute the cost incurred in promoting sales and retaining customers’. For example:

(i) Salaries and commission to sales personnel.

(ii) Advertisement and publicity.

(iii) Show room expenses, such as rent, insurance.

(iv) Expenses of sale promotion, gifts, samples etc..

(v) Exhibition Expenses.

(vi) Estimating of tender Expenses.

(vii) Counting house salaries.

(4) Distribution Overhead

These comprise indirect expenses incurred from the time the product is completed in the factory until it reaches its point of sale For example,

(i) Rent, rates and insurance of warehouse.

(ii) Depreciation of delivery vans.

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(iii) Wages of packer dispatch clerks and cleaners.

(iv) Freight and insurance charges.

(v) Travelling expenses.

(vi) Discount, trade discount, commission and brokerage.

(vii) Sample expenses.

(viii) Expenses of catalogues and price lists.

(ix) Insurance and taxes of finished goods.

(x) Normal Bad Debts.

(xi) Salaries of travelling agents.

(xii) Warehouse wages.

(xiii) Parcels sent to customer.

(xiv) Road licenses for delivery vans.

(xv) Royalty payable on the basis of number of units sold.

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