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Cost Accounting

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Overheads

Overhead costs are also termed as indirect or supplementary costs. These are costs which cannot be wholly debited directly to a particular job. These are neither direct material nor direct wages nor are these expenses of a direct nature and, therefore, these cannot enter the direct costs of manufacture. But such expenses constitute an essential element of cost as they are incurred for manufacturing a commodity or making it ready for sale. They may arise either inside or outside the factory, e.g. foreman’s salary is an overhead charge occurring within the factory while office manager’s salary is an overhead charge occurring outside the factory.

Classification of overheads

Overheads may be classified according to their nature, variability, function and a number of other characteristics. The classification can be summarized as follows:

According to nature

(i) Indirect material.

(ii) Indirect labour.

(iii) Indirect expenses.

According to normality

(i) Normal overheads.

(ii) Abnormal overheads.

Normal overheads refer to such overheads which are expected to be incurred in attaining a given output. These overheads are unavoidable. They are, therefore, included in production costs.

Abnormal overheads refer to those overheads costs which are not expected to be incurred in attaining a given output e.g. cost of abnormal idle time. Such costs are charged to costing profit and loss account.

According to controllability

(i) Controllable overheads.

(ii) Uncontrollable overheads.

Controllable overheads are those which can be controlled by executive action at the point of their occurrence. Overheads which are not so controllable are termed as uncontrollable. For example, cost of power used in a particular department can be controlled by the departmental manager, but the share of general lighting costs in the factory to be borne by his department.

According to variability

Fixed overheads: These costs are not affected in monetary terms during a given period by a change in output. But this will be true only when the change in output is not substantial. If the change in output is substantial these will also increase and will remain constant after such an increase till a certain level of activity is reached. The examples of such costs are – rent and rates; insurance of buildings, plant and fittings, salaries etc.

Variable overheads: These costs change in the same ratio in which the output changes. The examples of such costs are – power, selling commission etc.

Semi-variable overheads: These costs are partly fixed and partly variable. They do not change in the same ratio in which the output changes. The examples of such costs are – depreciation, cost of repairs and maintenance etc. In case the factory output is doubled, the depreciation would not normally be doubled. It may increase by 50% only as the amount of depreciation depends upon (i) efflux of time and (ii) wear and tear. That part of depreciation which is due to passage of time is fixed, while that part which is due to wear and tear is variable, and that is why depreciation is a semi-variable expense.