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Unit 8: Overheads

the implementation of the decision to produce a new or improved method and ends Notes
with the commencement of formal production of the product.

(iii) Variability-wise Classification: The overheads can be classified according to variability into:
(a) Fixed Overheads:. The fixed overheads are related to the periods, and so the fixed
costs are also known as Period Costs. The examples of fixed overheads are: rent and
taxes of the factory and office buildings, insurance charge of plant, machine and
building of factory and office, depreciation of building and machine of factory and
office, salaries of foreman, works manager and other managerial staff, interest on
capital, watchman’s salary, monthly repairing charges, fixed charges of telephone,
depreciation of office furniture, salaries of permanent staff of sales department, rent
and depreciation of the sales office or the warehouse, depreciation on delivery vans,
fixed expenses of guest house, etc.

Did u know? Fixed overhead is one which tends to be unaffected by variation in volume of
output. But they are fixed up to a level of production

A feature of the fixed overhead is that the rate of output per unit reduces as the
production increases and vice versa. For example, the fixed overhead cost is ` 4,000.
If 100 units are produced, the cost per unit will be ` 40 and if the production increases
to 200 units, the cost per-unit will go down to ` 20 per unit. The cost per unit changes
but the total cost remains the same.
(b) Variable Overheads: These costs change in the same ratio in which the output changes.
It means, the variable overhead is one which tends to vary directly with volume of
output. The variable cost increases in direct proportion with the increase in production
and decreases in the same proportion with decrease in production. It is known as
direct cost. The examples of variable overhead are: fuel and power, lighting, hearing,
overtime, small tools, store expenses, postage, stationery, salesman’s commission,
discounts to customers, bad debts, branch expenses, travelling salesman’s expenses,
packing charges, carriage outward, variable expenses on delivery vans, etc.

Notes On making a comparison between fixed cost and variable cost, we find that the total
fixed cost remains constant, while the total variable cost changes proportionately.

Two figures are given, the first figure is related to Fixed overheads and second figure is showing
Variable overheads.

Figure 8.2: Variable Overhead

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