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Cost Accounting – I

Notes (i) Nature-wise Classification: Under this classification, expenditures are classified into three
categories:

(a) Indirect Material: Indirect materials which are used in the manufacturing process,
which cannot be allocated to a particular job or production but is absorbed by cost
centers or cost units. The examples of indirect materials are consumable stores,
lubricating oil, loose tools, cotton waste, etc.
(b) Indirect Labour: It includes such wages which cannot be allocated, but which can be
apportioned by cost centre or cost unit. The examples of indirect labour are salary
of foremen, supervisors, works manager, store-keepers, wage of maintenance, idle
time cost, holiday pay, workers compensation, employer’s contribution to provident
fund, overtime wages, etc.
(c) Indirect Expenses: The expenses which cannot be allocated directly but which can
be apportioned to or absorbed by cost centre or cost unit. The examples of indirect
expenses are factory rent charge, charges of lighting and heating, depreciation,
insurance, factory expenses, administration, selling and distribution expenses, etc.
(ii) Function-wise Classification: Under this classification, the various functions performed by
the industry or organization. In this classification overheads are classified as follows:
(a) Production or Manufacturing Overheads: It is also known as factory overhead, works
overhead or manufacturing overhead. The production overhead is the indirect cost
which includes indirect material, indirect labour and indirect factory expenses. It
includes all overheads incurred from the stage of production of materials till the
completion of the manufacture. Following are the production overheads e.g. rent,
municipal taxes, depreciation, insurance of the factory, machines and equipments,
factory lighting, heating and air-conditioning, fuel and power, drawing expenses,
factory manager salary, consumable stores, small tools, repairs of factory buildings,
plant, machines and equipments, store-keeping expenses, cost of idle time, overtime,
holiday pay, workers’ training and welfare expenses, inspection, factory telephone
and stationery expenses.
(b) Office and Administration Overheads: These are also known as general overheads. It is
the indirect expenditure incurred in formulating the policy, directing the organization
and controlling the operations of an undertaking which is not related directly to
research and development or production and selling activities. The administrative
overhead costs may include the following: account office expenses, audit fees,
office staff salaries, postage, stationery, telephone and telegrams, legal expenses,
depreciation, insurance, rent of the office building, office equipments and office
furniture, bank charges, salary to general manager and office electricity expenses.
(c) Selling Overheads: It is the expenditure incurred in promoting sales and retaining
customers. It includes: advertisement, bad debts, quotations, price lists, salaries and
commission of salesmen, selling agents, travelling expenses, postage, telephones,
stationery of sales office, salary of sales manager and sales office staff, window-
dressing expenses, etc.
(d) Distribution Overheads: The expenses pertaining to delivery of goods to the customers
fall under this distribution overhead. It includes: packing material and expenses,
carriage outward, transport expenses, maintenance, repairs, depreciation of delivery
vans, depreciation, repairs of the warehouse, salary of warehouse staff, insurance of
warehouse, losses in warehouse, wastage of finished goods, etc.
(e) Research and Development Overheads: The research expenses are the cost of searching for
new and improved products, new applications of products and improved methods
and techniques. The development cost is the cost of the process which begins with

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