Page 76 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 5: Overheads

Function-wise Classifi cation Notes

This classification is done on the basis of major function of a concern. It, therefore, includes
production overhead, administration overhead and selling and distribution overhead.

Element-wise Classifi cation

This classifi cation is done according to the expenditure and follows the defi nition of overhead.
Under this method, overhead is broken down into indirect material, indirect labour and indirect
expense.

Behaviour-wise Classifi cation

This classification is done on the basis of variability in relation to production. Based on this
behaviour, the overhead expenses may be classified into three groups:

1. Fixed expenses, that is, expenses that are not affected by changes in output or sales such as
rent, salaries, etc.
2. Variable expenses, that is, expenses that change in the same proportion in which output
(or sales) changes for example, power consumed, indirect materials, insurance in transit,
carriage outwards, etc.
3. Semi-variable expenses, that is, expenses that change in the same proportion to which
output (or sales) changes but not in the same ratio. Depreciation is not doubled if output is

doubled it may be 50% more. Semi-variable expenses are partly fixed and partly variable.
Self Assessment

Fill in the blanks:
1. ...................... are those indirect costs which cannot be directly related to any product, job or
process, because they cannot be directly attached to production activities.
2. The total cost is divided into: Prime Cost, ...................... and Administrative Cost.
3. Overhead comprises of ......................, indirect labour and indirect expenses.
4. ...................... are not affected by changes in output or sales.

5. Variable expenses change in the same proportion in which ...................... changes.
6. ...................... expenses are partly fixed and partly variable.

5.2 Absorption of Overheads

Different methods may be adopted for determination of absorption rates for fixed and variable

overheads. The fixed overhead rate serves as a measure of utilisation of the facilities while the
extent of idle capacity is indicated by under absorption.
The following are the main methods of absorbing factory overheads:
1. Percentage on direct material cost

2. Percentage on direct wages
3. Percentage on prime cost
4. Direct labour hour rate

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