COST Saba Shaikh - 251

Tanvir Shaikh - 252

ACCOUNTING Ajit Sharma - 253

Manisha Sharma - 254

OVERHEADS Shefali Patil – 255

Dirgha Shertukde - 256
Jayesh Shikare - 257
Mayuri Shinde - 258
Pallavi Shinde - 259
Sonali Shinde - 260
 DEFINITION OF OVERHEADS

Overheads are those costs required to run a business which cannot

be directly attributed to any specific business activity, product, or
service. Thus, overhead costs do not directly lead to profits.
Overhead is necessary as it provides critical support for the
generation of profit-making activities
EXAMPLES OF OVERHEADS
Accounting and legal expenses
Licenses and government fees
Administrative salaries
Depreciation
Insurance
Rent
Utilities
 ALLOCATION OVERHEAD
Overhead allocation is the apportionment of indirect costs to produced goods.
Manufacturing overhead is all of the costs that a factory incurs, other than direct
costs. You need to allocate the costs of manufacturing overhead. There are two
types of overhead, which are administrative overhead and manufacturing
overhead any inventory items that are classified as work-in-process or finished
goods.
ABSORPTION OF OVERHEAD
Absorption of overheads refers to charging of overheads to individual products or
jobs. It is a process of distribution of overheads allotted to a particular department
or cost centre over the units produced. The absorption of overhead is done by
applying overhead absorption rates
 APPORTIONMENT OF OVERHEAD
Distribution of an overhead cost to several departments or cost centres is known
as apportionment of overheads. It is the process of charging or apportioning costs
to a number of cost centres or cost units. If a given cost is common to two or more
departments or cost centres, such cost should be apportioned or divided among
these departments on an equitable basis.

ABSORPTION COSTING
Absorption costing is a costing system that is used in valuing inventory. It not only
includes the cost of materials and labour, but also both variable and fixed
manufacturing overhead costs. Absorption costing is also referred to as full
costing.
 PRODUCTION OVERHEAD

Overhead refers to the ongoing business expenses not directly

attributed to creating a product or service. It is important for
budgeting purposes but also for determining how much a company
must charge for its products or services to make a profit. In short,
overhead is any expense incurred to support the business while not
being directly related to a specific product or service.
 SECONDARY DISTRIBUTION
Secondary distribution of overheads may be done by following either
Reciprocal Basis and Non - Reciprocal Basis . While reciprocal basis considers
the exchange of service among the service departments, non-reciprocal basis
considers only once directional service flow from a service cost centre to
other production cost centres.

In reciprocal secondary distribution, the cost of service cost centre are

apportioned to production cost centres as well as other service cost centres.
In such cases, any one of the following three methods may be followed:
• Repeated Distribution Method
• Trial and Error Method
• Simultaneous Equation Method
 PRODUCTION OVERHEADS ABSORPTION RATES
Overhead absorption rate is a rate charged to cost unit intended to account for the
overhead at a predetermined level of activity. On the basis of direct labour hours,
direct labour cost or machine hours, overhead is attributed to a product or service.
If the number of units is a basis for determining overhead rate, the following
formula is used.

Overhead Rate = Amount of Overhead for the period / Total number of

units to be produced for the period

The overhead absorbed in a period will be found out by multiplying overhead rate
by total number of units produced for the period.
 MACHINE HOUR RATE
The machine hour rate is similar to the labour hour rate method and is used where
the work is performed primarily on machines.

Overhead Rate = Amount of Overhead for the period / Total number of

units to be produced for the period

Illustration :
If factory overhead is Rs 3, 00,000 and total machine hours are 1,500, the machine
hour rate is Rs 200 per machine hour (Rs 3, 00,000 ÷ 1500 hours).
 ADMINISTRATION OVEHEAD
Administrative overhead is those costs not involved in the development or
production of goods or services. This is essentially all overhead that is not included
in manufacturing overhead.

Examples of administrative overhead costs are the costs of:

Administration Administration Front office Outside

Office
and sales and sales and sales legal and
supplies
telephones utilities salaries audit fees
 SELLING AND DISTRIBUTION OVERHEAD

 Selling overhead refers to all costs of seeking to create and stimulate demand
or of securing orders .
Eg. Sales office expenses , advertisement, etc.

 Distribution overhead refers to all expenses incurred from the time the product
is finished in the factory till it’s delivery to ultimate customers or consumers.
Eg. Rent of warehouse, packing charges , etc.
 SPECIAL EFFECT OF OVERHEAD

 Overhead refers to the ongoing costs to operate a business but excludes the
direct costs associated with creating a product or service.

 Overhead can be fixed, variable, or a hybrid of both.

 There exist different categories of overhead, such as administrative overhead,

which includes costs related to managing a business.
 OVER / UNDER ABSORPTION OF OVERHEAD

The overheads are absorbed on the basis of predetermined overhead absorption

rate according to the actual production of goods throughout the accounting
period or specific period. Budgeted overheads and budgeted output are used to
determine overhead rate. If budgeted overhead and budgeted output differ from
actual overhead and actual output, three is a difference between predetermined
overhead rate and actual overhead rate.
REASONS FOR OVER / UNDER ABSORPTION OF OVERHEAD
The actual hours worked is more or less than the budgeted hours.
The actual overhead costs are different from budgeted overheads.
Both actual overhead costs and actual activity level are different from the
budgeted costs and level.
The method of overhead absorption may be wrong.
Unexpected expenses may be incurred during the accounting period.
Extra ordinary expenses might have been included in the calculation of overhead
absorption rate.
 Seasonal fluctuations in the overhead expenses from period to period.