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Classification of Overheads under production and distribution

Updated on November 11, 2013
Sky is the limit for others, but we start from the sky.
Sky is the limit for others, but we start from the sky.

Classification of Overheads

According to the common characteristics we can classify or group the overheads.  This grouping help the managers and other officers concerned to classify the Over heads.   Major common characteristics through which we can classify overheads are:

1. Behaviour
2. Elements
3. Functions.

Behaviour-Wise Classification

On the basis of variability nature of production we can classify overheads as:

1. Fixed Overheads
2. Variable Overheads
3. Semi-variable overheads

Fixed Overheads:
In most of the cases cost of some overheads like Salaries, Rent and rates, legal expenses, bank charges etc. are fixed. There is no changes in such overheads irrespective of the output or level of production.  Decrease in production or increase in production does not affect such overheads.  Effect of such fixed expenses will decrease if the production increase as the increase in number of units will decrease the cost.  On the other hand decrease in production increase the effect of fixed cost per unit.

Variable Overheads: Some of the overheads like power, fuel, Salesmen commission, indirect materials, stationary, etc. will vary according to the production or unit of products.  Such overheads are called variable overheads.  Increase in production will result in increase of such overheads.  Decrease in production will result in decrease in variable overheads.

Semi-Variable Overheads: Overheads like depreciation, cost of supervision, telephone charges, repair and maintenance are stands midway between fixed and variable overheads.  Such overheads are grouped under the Semi-variable overheads.    They are partly fixed and partly variable.  The changes in such overheads does not directly proportionate to the variation of production. 

Element wise Classifiction

According to the elements, overheads can be classified in to three groups they are:

3. Indirect Labour
2. Indirect Materials.
1. Indirect Expenses.

Indirect Labour:  Labour expenses incurred for the payment of watchman, cleaner, clerk, supervisor, peon are not directly part of the labour expenses of production.  Even though they help or assist production, they are not directly engaged in the process of production.  Such overheads are classified under the head of  indirect labour expenses.

Indirect Materials:
Materials like lubricating oil, grease, coal, sandpaper used in polishing, Cotton waste used for cleaning the products etc. does not become a part of finished goods.  Such materials which does not become a part of finished goods are called indirect materials.  At the same time some materials which may form the part of finished goods but of small value like pins, nuts, screws etc can be considered as indirect material for the convenience of finding the cost.

Indirect Expenses: Expenses like insurance, advertising, rent, depreciation, power and lighting are come under overhead of indirect expenses.  All expenses which will not come under the indirect labour and indirect materials come under the head of Indirect Expenses. 

Function-wise Classification

Classification done under the department or function comes under the function wise classification of overheads.   Following are the major functions or departments:

1. Production overheads
2. Administration overheads
3. Selling overheads
4. Distribution overheads.
5. Research and Development

Production overheads: There are various expenses from the initial stage of production ill the completion of finished product.  These include indirect wages, indirect material cost, indirect factory expenses.  These expenses are comes under the function of production or at the production department for maintaining and running the production department of an organization.  Indirect wages, indirect expenses and indirect materials used for the production department comes under the production overheads.

Examples of production overheads are:
1. Indirect Expenses like factory light, factory rent, normal loss of material, overtime, Idle time etc.
2. Indirect Materials like cotton waste, grease, coal, oil etc
3. Indirect Wages like salaries of store keeper, supervisor, peon, watchmen etc.

Please note 'Manufacturing overheads', 'Factory overheads' or 'Works overheads' are some of the other terms used for production overheads.

Administration overheads: Expenses for the functions like Managing, directing, planning, coordinating and controlling comes under the head of administration overhead.  In short all expenses other than the production, selling, distribution and research and development comes under the administration overheads. Legal expenses, auditors fees, telephone charges, vehicles for managers, office rent, Salaries of office staff, office lighting and repairs of office buildings and equipments are some of the examples of administration overheads.

Selling overheads:  Costs incurred for creating demand for the product and securing and servicing orders comes under the selling overheads.  Advertisement, bad debts, commission to selling agents, Salaries of sales persons, showroom expenses, traveling expenses are some of the examples of Selling overheads.

Distribution overheads: Maintenance, depreciation and repairs of delivery vans, packing cost, carriage outwards, wastage of finished goods, warehouse expenses are some of the examples of distribution overheads.  The costs incurred in connection with the delivery of goods to customers called distribution overheads.


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