Introduction to Over Heads - General
Overhead costs are also known as indirect or supplementary costs. These are costs that cannot be completely debited directly to a specific job. These are neither direct wages nor direct material nor are these expenses of a direct nature and, so, these cannot enter the direct cost of manufacture. But such types of expenses comprise a necessary element of cost as they are acquired for manufacturing a commodity or making it ready for sale. They may occur either inside or outside the factory, example foreman's salary is an overhead charge taking place under the factory when office manager's salary is an overhead charge taking place outside the factory.
One of the categories of costs is on the basis of 'Nature' where costs are categorized like 'Direct' and 'Indirect'. Direct costs are those that are identifiable with a cost object or a cost center when indirect costs are not noticeable to cost object or cost center. Other word, indirect costs cannot be related with the product offered through the firm. If a firm produces only one product, all costs are direct but if more than one product is manufactured, the indirect costs acquired are not traceable with a specific product. So, when direct costs are allocable to a service, cost unit, job, process, or a cost center, indirect costs cannot be so due. These indirect costs are termed as 'Overhead' costs. As per to CIMA, overhead costs are described as, 'the total cost of indirect materials, indirect labor and indirect expenses.' So, all indirect costs such as indirect materials, indirect labor, and indirect expenses are termed as 'overheads'. Instances of overhead expenses are rent, repairs, supervision, marketing expenses, taxes, depreciation, selling and distribution expenses, maintenance, factory lighting, printing stationery etc.
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