Overheads

Resources consumed or lost in completing a process and which cannot be traced directly to the cost of the product.

Overheads are indirect costs. Overheads are total of:

1)  Indirect materials (e:g nails in a chair, gum used in table )

2)  Indirect labour (e:g supervisor, storekeeper)

3)  Indirect expenses (e:g rent, machine running expense)

Overheads can be categorized into:

Production Overheads
Non-production overheads
Production overheads are those, that are directly related to production e:g machine insurance, machine greases etc.

Non-production overheads are not directly related to production e:g selling and distribution cost, research cost etc.

The production and non-production overheads are further categorized into:

Variable overheads
Fixed overheads
Variable overheads are those indirect cost which varies with the level of output but constant for unit cost e:g salesman commission, electricity charges etc.

Fixed overheads are that cost which remain the same for a given level of output during the period e:g rent and rates, factory managers salary etc.