Classification of Overheads under production and distribution
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.
