The Meaning and Definition of Overheads In Cost Accounting.
Overheads may be defined as the aggregate of the cost of indirect materials, indirect labor and such other expenses including services as cannot conveniently be charged direct to specific cost units. Thus overheads are all expenses other than direct expenses. In general terms, overhead comprise all expenses incurred for or in connection with the general organisation of the whole or part of the undertaking i.e. the cost of operating supplies and service used by the undertaking and including the maintenance of capital assets. The main groups into which overheads may be sub-divided are the following:
(a) Manufacturing or production or Works Overhead: It is the indirect expenses of operating the manufacturing divisions of a concern and covers all indirect expenditure incurred by the undertaking from the receipt of the order until its completion ready for dispatch either to the customer or to the finished goods store. Examples of such expenses are: depreciation and insurance charges on fixed assets like plant and machinery, works, building, and electric equipments and floating assets; electricity charges; coal and other fuel charges; rent, rates and taxes on works, land and properties, works office printing, stationery, postage, telegrams and telephone charges; welfare services like canteen and recreation clubs; medical services like dispensary and hospital and service department expenses.
(b) Administration overhead: It is the indirect expenditure incurred in formulating the policy, directing the organisation and controlling the operations of an undertaking which is not related directly to a research, development, production or selling activity or function. it consists of all expenses incurred in the direction, control and administration (including secretarial, accounting and financial control) of an undertaking. Examples are the expenses in running the general office e.g. office rent, light, heat, salaries and wages of clerks, credit approval.
(c) Selling overhead: It is the cost of seeking to create and stimulate demand and of securing orders and comprises to cost to products or distributors of soliciting and recurring orders for the articles or commodities dealt in and of efforts to find and retain customers. These include sales office expenses; salesmen’s salaries and commission; showroom expenses; advertisement charges.
(d) Distribution overhead: It is the expenditure incurred in the process which begins with making the packed product available for despatch and ends with making the reconditioned return empty package, if any available for reuse. It comprises all expenditure incurred from the time the product is completed in the works until it reaches its destination. Under these would be included warehouse rent; warehouse staff salaries, insurance etc.