OVERHEA

DS
The total cost of indirect materials, indirect labor and indirect expenses
are called overheads. i.e Depreciation, Printing & Stationery , Factory
exp. etc.

Classification of
Overheads

Nature/Trace
on product
Direct
Overhe
ad

Indirect
Overhe
ad

Activity or
Volume
Fixed

Variab
le

SemiVariabl
e

Direct Overhead :-Direct Overhead are the costs which are

identifiable with the product unit or cost center. i.e Cost of wood for
Furniture, Cost of Cloth for Shirt, Cost of Plastics R/M for Container.
Indirect Overhead:- Indirect Overhead are not identifiable with
the product unit or cost center and hence they are to be allocated,
apportioned and then absorb in the production units.i.e. Salary of
Management , Guard Sweeper Wages etc.

Fixed Overhead :- In Fixed Overhead the total amount remain

same (does not change even if production volume change)while per
unit fixed cost is always variable. Examples of these costs are salaries,
insurance, rent, etc.

Variable Overhead :- Those Overhead that vary directly or

proportionately with the output i.e D/M Cost, D/L Cost. Variable cost per unit
is constant but the total is changes correspondingly level of output.

Semi-Variable Overhead :- These Overhead are neither

totally fixed nor totally variable. Maintenance costs, supervisory costs
etc. These costs are also called as stepped costs.

Absorption of Overheads:- The process of absorbing all overhead

costs allocated or apportioned over a particular cost center or
production department by the units produced are called absorbing.
Overhead Absorption Rate = Overhead Expenses/ Units of the base
selected.
Methods used for absorption
Direct Material Cost :- Budgeted or Actual Overhead Cost/ Percentage
(%)of Direct Material Cost
Direct Labor Cost Method :- Budgeted or Actual Overheads/
Percentage (%)of Direct Labor Cost
Prime Cost Method :- Budgeted or Actual Overheads/ Percentage (%)
of Prime Cost
Production Unit Method :- Overhead absorption rate = Budgeted or
Actual Overheads/Production Units
Direct Labor Hour Method :- Budgeted or Actual Overhead Expenses/Direct
Labor Hours

Machine Hour Rate

Machine hour rate is the cost of operating a machine on per hour
basis. The formula for calculating the machine hour rate is :Budgeted or Actual Overhead Expenses/ Machine Hours

By
CA JITENDRA MAHASETH
CIPET HAJIPUR