OVERHEADS IN COST ACCOUNTING | CLASSIFICATION OF OVERHEAD COSTS

DEFINITION OF OVERHEAD:

According to Wheldon,” The cost of indirect materials, indirect, labour and such other expenses, including services. Moreover, it cannot conveniently charge directly to a specific cost unit.”

In simple words, overheads are all cost another then direct cost. In addition, all costs incurred over and above the prime cost are overheads. The term burden’, ‘supplementary costs’,’on cost’ etc use interchangeably for overheads.

CLASSIFICATION OF OVERHEAD COSTS:

The various classifications in the following:

FUNCTION WISE CLASSIFICATION: When overhead expenses are classified with reference to major activity divisions of a concern, it is the called functional classification of overheads. In other words, this classification is necessary because for having separate methods of accounting. Its main types:

  • Production overheads:
  • Administration overheads
  • Selling overheads
  • Distribution Overheads
  • Research and development expenses

BEHAVIOUR WISE CLASSIFICATION: Behaviour wise classification refers to their tendency to vary with production and sales volume. In addition, it also includes activity levels. Some expenses vary directly with the rise and fall in output. Based on this behaviour, the expenses may be also classified into:

  • Fixed overheads
  • Variable overheads
  • Semi-variable overheads

ELEMENT WISE CLASSIFICATION: This classification of overhead is done according to nature and as well as sources of expenditure and follows naturally from the definition of overhead. According to this classification, the total expenses are broken up into:

  • Indirect material
  • Indirect labour
  • And also Indirect expenses

Related topic:

TERMS INVOLVE IN COST ACCOUNTING

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