Overhead

What is Overhead cost?

In business accounting, overhead is general operating expenses, including such items as heat and electricity for the premises, that have no direct relationship to the production or selling of a company's goods and services. In computers, overhead refers to the processing time required by system software, which includes the operating system and any utility that supports application programs. Overhead sometimes describes the amount of processing time the installation of a particular feature will add to the amount already required by the program. In telecommunications, overhead refers to the processing time required by codes for error checking and control of transmissions.

What is Overhead cost? What are the various ways to classify it?

Overhead Cost is the total of all indirect costs which includes indirect material cost, indirect labour cost, and indirect expenses. These costs are known as indirect costs as they cannot be attributed to any specific business activity. Example: Rent, insurance etc.

There are various ways in which the overheads can be classified:

Element wise Classification:
-Indirect material
-Indirect labour
-Indirect expenses

Function wise:
-Factory Overheads
-Administration Overheads
-Selling and Distribution Overheads

Variability wise:
-Fixed Overheads
-Variable Overheads
-Semi-Variable Overheads

Controllability wise:
-Controllable Overheads
-Uncontrollable Overheads

Normality wise:
-Normal Overheads
-Abnormal Overheads

Definition Of Overheads:

Overheads are costs which do not relate solely to the cost units and must be shared equitably between them. Examples of overheads are indirect material cost, indirect labour and indirect expenses.

Types of Overheads	Description
Production overheads	Relates to those indirect costs incurred to produce the products Examples: indirect materials, indirect wages, factory rent and factory insurance and factory depreciation of plant and machinery
Administration overheads	Relates to those costs on office/administrative supports. Examples: office salaries, stationery, office rent, office maintenance, audit fees
Selling overheads	Relates to those costs on the selling of the products Examples like salesmen’s salaries, commissions, incentives and traveling expenses.