Examples of Overhead Costs: Top 11 Examples | Cost Accounting

Examples of Overhead Costs: 1. Manufacturing Overhead 2. Administration Overhead 3. Selling and Marketing Overhead Costs 4. Distribution Overheads 5. Research and Development Costs 6. Fixed Overhead Costs 7. Variable Overhead 8. Semi-Variable Overhead Costs 9. Indirect Materials Cost 10. Indirect Labour Cost 11. Indirect Expenses.

1. Manufacturing Overhead:

This is the total of indirect costs in production function of an organisation. It includes all the expenses incurred from the time of receipt of raw material until the production is completed and the finished product is kept ready for despatch except the direct wages and expenses. Manufacturing overhead is also known as production overhead or factory overhead or works overhead or works on cost, etc.

W.M. Harper, defines production overhead as- “Overhead incurred in production, i.e., generally speaking, overheads incurred with in the four wails of the factory proper”.

Examples of production overheads are depreciation of plant and machinery, power costs factory rent, lighting, stationary, supervision charges, insurance of plant and machinery, works manager’s salary, unproductive wages, repairs of plant and machinery, consumable stores, etc.

2. Administration Overhead:

These are the expenses incurred for management of an organisation. It is the sum of those costs of general management, secretarial, accounting and administrative services, which cannot be directly related to the production.

Examples of administration overheads are office rent, salaries, directors’ fees, office lighting, bank charges, legal expenses, depreciation and repairs of office furniture, etc.

3. Selling and Marketing Overhead Costs:

Marketing Costs:

Marketing costs are defined by I.C.M.A., London as “the cost incurred in publicizing and presenting to customers the products of the undertaking in suitably attractive forms and acceptable prices, together with the costs of all relevant research work the securing of orders and usually delivery of goods to customers. In certain cases, after-sales service and/or order processing may also be included”.

Selling Costs:

It has been defined by I.C.M.A., London as “that portion of marketing costs which is incurred in securing orders”.

Thus, Marketing and selling overhead refer to indirect costs which are incurred for creating and stimulating demand, securing orders and retaining the customers.

Examples of selling and marketing expenses are advertisement cost, salesmen’s salaries, commission on sales, sales office rent, sales office expenses, cost of marketing information system, costs of catalogues and price lists, etc.

4. Distribution Overheads:

It is that portion of marketing costs incurred in warehousing saleable products and in delivering products to customers. It includes all expenses incurred from the time product is made in the factory until it destination. The examples of distribution expenses are carriage outward, warehouse staff salaries, warehouse rent, warehouse lighting delivery van expenses, packing required for transport and insurance, etc.

5. Research and Development Costs:

Research cost is the indirect cost incurred in searching for new products, new uses of existing products, new materials and new methods of production, etc. Developing cost is the cost incurred for implementing or introducing new products, methods and new applications or uses for existing products. Examples are raw materials used for research, depreciation of equipment used for research, research staff salaries, depreciation of building used for research, lighting expenses, etc.

6. Fixed Overhead Costs:

Fixed overhead costs or period costs remain constant irrespective of changes in volume of output and sales. There are some items of expenses which are to be incurred whether the production takes place or not. These items are incurred over a period of time and are hence known as period costs.

Fixed overhead costs per unit decreases as production increases and increases as production decreases as production increases and increases as production decreases. Fixed overheads are not always fixed. They remain constant only in the short run. They will vary in the long run. Examples of fixed expenses are rent of building, salaries of managers, allowances of directors, bank charges, stationary, insurance, etc.

7. Variable Overhead:

It is defined as- “A cost which in the aggregate, tends to change in direct proportion to change in the volume of output or turnover”. These costs are referred to as costs which are directly related to production. Total variable cost will vary directly in proportion to volume of output, while unit variable cost remains constant at all levels.

Some examples of variable overheads are:

Indirect labour, indirect material, power and fuel, spoilage, overtime pay, idle time pay, etc.

8. Semi-Variable Overhead Costs:

Semivariable or semi fixed costs have the features of both the fixed and variable costs. These costs remain fixed upto a certain volume of output but they will change once the volume of output changes. For example supervisor’s salary where one supervisor may effectively supervise five or six employees is fixed. But if more output is required more number of workers are required and supervision is required additionally, which results in increase in supervisors’ salary.

Examples of semivariable costs are:

(a) Supervision

(b) Inspection

(c) Telephone expenses, and

(d) Postage & Stationery, etc.

Cost Segregation i.e., Determination of Degree of Variability of Expenses:

Semifixed or semivariable expenses are segregated to determine the portion which is variable and the portion which is fixed. The segregation of past costs into variable and fixed ones provides the basis for the prediction of future cost behaviour.

Separation of semivariable expenses into fixed and variable portions can be done by applying any of the following methods:

(1) Comparison by period or level of activity method

(2) Range or high and low points method

(3) Analytical method

(4) Scatter graph method

(5) Least square method, and

(6) Simultaneous equation method.

9. Indirect Materials Cost:

The indirect materials are consumed in general for number of output units as a common cost, which cannot be identified with particular cost units. They can be apportioned to cost centres and then finally absorbed by cost units.

Examples of indirect materials are:

Materials used in repairs and maintenance of machinery, building, etc. Lubricants, cotton waste, bricks, cement, etc., stationery used in office, advertising posters, pamphlets, distributional packaging material, etc.

10. Indirect Labour Cost:

The wages and salaries which cannot be identified with particular cost centres and cost units are indirect labour. The indirect labour is apportioned to and absorbed by cost centres and cost units. Generally, the indirect wages are paid to employees who are employed other than on production. Examples are- Supervisors salary, maintenance workers wages, remuneration of material handling and internal transport personnel, leave pay, employer’s contribution to PF and ESI, management salaries, salesmen’s commission and salaries, etc.

11. Indirect Expenses:

These are the expenses incurred commonly for more than one cost centre. They cannot be traced to a particular cost centre or cost unit. The indirect expenses are generally apportioned and absorbed by cost centres and cost units. Examples of indirect expenses are rent, insurance, canteen and welfare expenses, power and fuel, lighting, heating, telephone expenses, etc.