Classifications of Overheads

Classification of overheads

Classification of overheads- Classification is the process of grouping of costs depending upon their common characteristics

There are various methods of classifying or grouping of overheads, which greatly depend upon the various objectives of classification of overheads

 

     

Classification according to Nature

1) Indirect Material- The cost of material which cannot be allocated to a particular unit and does not form a part of finished product is termed as indirect material. For example, consumable stores, fuel, small tools, lubricating oil, cotton waste, etc.

2) Indirect Labour - Labour charges which cannot be allocated to a particular unit of cost is called indirect labour or wages. For example, salary of supervisors, wages of maintenance workers, overtime, ideal time, PF Cont.

3) Indirect Expenses- most items of expenditure are classified as indirect, since they are incurred for the business as a whole, rather than in regard to a particular product. For example, rent rates, insurance taxes canteen, and welfare expenses, lighting and heating, hospitals training and development dep. of plant and machinery

Classification according to the function

1) Factory overhead – factory overhead includes all overhead cost incurred from the stage of procurement of material till the completion of the finished product but excludes the expenses on administration, selling and distribution.

Rent, rates and dep. of factory building

Insurance of factory building

Salary of foremen, time-keeper, works manager

Fuel, power, coal

 Facto y lighting heating,

Welfare expenses, canteen exp, telephone charges of factory

2) Administrative overheads

This overhead includes the expenses of managerial functions of direction, planning and controlling the operation of business, other than selling and distribution, research and development.

For example- office rent, office salary

Printing and stationary, lighting, telephone charges of office

Audit fees

Director’s fees

Legal expenses

Bank charges 

3) Selling and distribution

Selling expenses includes the expenses in promoting sales and retaining customers

Advertisement, market research

Salaries and commission of salesman and selling agents

Travelling expenses of sales people

Salary, telephone, printing and stationary of sales department

Cost of free samples

4) Distribution overhead

The expenses related to delivery of sold goods to customers fall under this group –

Cost of secondary packing

Carriage outward and transport charges

Warehouse rent, depreciation of warehouse and repairs

Salary of warehouse staff

Repairing of empties

Expenses of warehouse van, trucks etc.

Classification according to Behaviour

   1. fixed overhead –fixed overhead remain fixed in their nature and do not vary with changes in the volume of output. There are certain expenses which must be paid, whether the factory is working or not, are known as fixed overheads. For example, salaries of staff, rent, postage, postage printing and stationary, insurance, depreciation of building, plant, taxes

2. Variable overhead – variable overhead is a cost which in the aggregate, tends to vary in direct proportion to changes in the volume of output. Total variable cost will tend to vary direct with volume, while unit variable cost is likely to remain constant at all level. For example indirect material, indirect labour, power and fuel, spoilage, stores handling, overtime etc.  

3. semi- variable overhead - this type of overhead, varies with a change in the volume of output, but not in such proportion as the output changes. This type stands between fixed and variable overhead. For example, repairs and maintenance, depreciation of plant and machinery, telephone charges salary to supervisor   

Classification of According to Normality 

1. Normal overhead- normal overheads are those expenses which are expected to occur in normal condition of business

2. Abnormal overhead- abnormal overheads are those expenses which are not expected to occur in normal condition of business 

Classification according to control

1. Controllable cost – controllable costs are those which can be controlled by an efficient management. For example, idle time, wastage etc. can be controlled.

2. Uncontrollable cost-   uncontrollable costs are those which cannot be controlled. All types of fixed costs are the best examples of uncontrollable overheads

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