Page 163 - DCOM202_COST_ACCOUNTING_I

Unit 8: Overheads

8.1 Meaning and Definition of Overhead Notes

Meaning of overhead: The term has overhead has a wider meaning than the term indirect
expenses. Overhead includes the cost of indirect material, indirect labour, and indirect expense.
This is the aggregate sum of indirect material, indirect labour and indirect expense.

Overhead = Indirect material + indirect labour + indirect expenses
Definition of overheads: The indirect costs or fixed expenses of operating a business (that is, the
costs not directly related to the manufacture of a product or delivery of a service) that range from
rent to administrative costs to marketing costs.

8.2 Classification of Overheads

The overhead classification depends upon the type and size of the business, nature of product,
services of the product and various policies of the management regarding product or output. The
following are the important basis of classification of overheads:
(i) Nature-wise Classification,
(ii) Function-wise Classification,
(iii) Variability-wise Classification,

(iv) Controllability-wise Classification, and
(v) Normality-wise Classification.
The following chart shows their classification at a glance:

Figure 8.1: Overheads – Classification

Classification of Overheads

Nature-wise Function-wise Variability-wise Controllability-wise Normality-wise
Classification Classification Classification Classification Classification

Indirect Production or Fixed Controllable Normal
Material Manufacturing Overheads Overheads Overheads
Indirect Overheads Variable Uncontrollable Abnormal
Labour Office and Overheads Overheads Overheads
Indirect Administration Semi-variable
Expenses Overheads Overheads
Selling
Overheads
Distribution
Overheads
Research and
Development
Overheads

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