Page 162 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I Sukhpreet Kaur, Lovely Professional University

Notes Unit 8: Overheads

CONTENTS

Objectives
Introduction
8.1 Meaning and Definition of Overhead
8.2 Classification of Overheads
8.3 Codification of Overheads
8.4 Overhead Accounting

8.5 Summary
8.6 Keywords
8.7 Review Questions
8.8 Further Readings

Objectives

After studying this unit, you will be able to:
z z Understand the meaning and definition of overheads;
z z Describe the classification of overheads;

z z Identify the codification of overheads;
z z Understand the overhead accounting.

Introduction

Overhead has been defined by the Institute of Cost and Work Accountants, London as
“the aggregate of indirect material cost, indirect wages and indirect expenses”. By indirect, it
means one “which cannot be allocated, but which can be apportioned to or absorbed by cost
centre or cost unit”. Overheads are those indirect costs which cannot be directly related to any
product, job or process, because they cannot be directly attached to production activities.. The
total cost is divided into: prime Cost, Factory Cost and Administrative Cost. Overhead comprises
of indirect material, indirect labour and indirect expenses.
Blocker has defined the overhead costs as “Operating of a business enterprise which cannot be
traced directly to a particular unit of output”. Overheads are the indirect costs which cannot be
directly allocated to any particular job and production activity or process as they are not capable
of being specifically identified to any particular activity.
!

Caution A major part of the total cost is overheads.

156 LOVELY PROFESSIONAL UNIVERSITY