A manufacturing concern incurs different items of costs while converting raw materials into finished outputs. Such costs can be classified on different basis. One such basis is the directness of the costs to the product unit or identifications of costs with a particular product unit.For example, raw materials can be directly identified with the product unit, whereas consumable stores or cotton waste can not be directly identified with any product unit. On this basis, therefore, the cost can be classified into direct costs and indirect costs. Hence, the total cost of a product consists of direct and indirect costs. The direct portion of the total cost is known as prime costs and the indirect portion is called overheads. In fact overheads are the total of all indirect costs incurred in the production of outputs which must be taken into account while ascertaining the total cost of a product or job.
The overheads are the aggregate of all indirect costs such as indirect materials, indirect wages and other indirect expenses. They are also known as 'common costs or on costs. They are called common costs because they are common expenses incurred for different products and departments. Similarly, they are also known as 'on cost' as they are the costs over and above the prime cost or total of all direct costs. Overheads or indirect costs are incurred not just for a particular product unit or cost center, but for a number of cost units or cost centers. Therefore, they cannot be identified with a particular cost center or cost unit. Hence overheads should be appropriately apportioned to a number of cost units or cost centers, while determining the total cost of different products.
Classification Of Overheads
Overheads can be classified on different basis. The common basis of classifying overheads are as follows.
1.Classification Of Overheads Based On Function
* Manufacturing Overheads
* Non-manufacturing overheads
2.Classification Of Overheads Based On Behavior
* Fixed Overheads
* Semi-variable Overheads
* Semi-fixed Overhead
3. Classification Of Overheads Based On Elements
* Indirect Materials
* Indirect labor (Wages)
4. Classification Of Overheads Based On Control
* Controllable Overheads
* Uncontrollable Overheads
Allocation Of Overhead And Apportionment Of Overheads
Concept Of The Absorption Of Overhead