INTRODUCTION

Overhead costs, often referred to simply as "overhead," are the indirect costs that a business incurs in its
regular operations but are not directly attributable to a specific product, project, or department. These
costs are essential for the business to function but are not tied directly to the production of goods or the
provision of servicesA company must pay overhead on an ongoing basis, regardless of how much or how
little the company sells.

Collection of overheads means the collection of various items of overheads under suitable account
heading and a unique Standing Order Number(S.O.N.) or Cost Account Number(C.A.N.).
Sources -> Material Requisitions
> Wages analysis Book
> Invoices
 > Cost Journal
> Subsidiary Records
 >Types of Overhead Costs
• Fixed Overhead: These costs remain constant regardless of production and business profit, like administrative costs, insurance
costs, or rent.
• Variable Overhead: These variable costs change depending on the production volume or the number of services you provide. This
may include gas for an oven, maintenance on your vehicles, and shipping or utility costs like heat and water that vary depending on
how much you use them.
• Semi-Variable Overhead: This includes semi-variable cost items like sales commissions on top of staff salaries or phone service with
additional roaming charges added due to travel for work. Any bills or costs may start at a predictable base amount but vary if use is
high.

> How to Calculate Overhead Cost?

If you have been wondering how to calculate overhead costs, it is simple. You just need to categorize each overhead expense of your
business for a specific time period, typically by breaking them down by month. While all indirect expenses are overheads, you must be
careful while categorizing them. Once you've categorized the expenses, add all the overhead expenses for the accounting period to get
the total overhead cost.
You can now find out the overhead percentage as a percentage of sales. An overhead percentage tells you how much your business
spends on overhead and how much is spent on making a product or service.

> Calculating Overhead Rate

To calculate the overhead rate, divide the total overhead costs of the business in a month by its monthly sales. Multiply this number
by 100 to get your overhead rate.
Overhead rate = Overhead/Sales
ALLOCATION OF OVERHEADS
 METHODS OF ABSORPTION OF OVERHEADS

OVERHEAD ABSORPTION RATE =

TOTAL OVERHEADS OF COST CENTRE/ TOTAL QUANTUM OF BASE

> METHODS:
1. PERCENTAGE OF DIRECT MATERIAL COST
2. PERCENTAGE OF DIRECT LABOUR COST
3. PERCENTAGE OF PRIME COST
4. DIRECT L A B O U R C O S T
5. MACHINE HOUR RATE
6. RATE PER UNIT OF PRODUCTION
THANK YOU!!