Understanding the meaning of overheads is very important for all students of accounting. An overhead is the indirect expense and is the money spent on running the business on a day-to-day basis. The manufacturing overhead costs need to be controlled to maintain high or significant profit margins. This requires proper financial planning and financial management on the part of the senior management of the company. Discussed below are some of the overhead cost examples and the concept of overheads.
Different Types of Overheads
The business operation expenses or the overheads can either be of the fixed type or variable type. The variable overhead costs are those which would change with an increase or decrease in the levels of production by the company. So, if a company decides to produce more goods, then these costs would go up and on the other hand, if the production is reduced because of lesser demand for the products or some other reasons, then the variable expenses will go down. Examples of variable overhead costs can include raw materials which are used increasingly. Fixed costs are those which will remain the same irrespective of the levels of production. These may consist of rent, insurance expenses and salaries of employees.
The most important of all the overheads for any enterprise are the factory overheads which are very useful in the calculation of factory cost. The factory overheads mainly consist of lighting costs, machinery cost, salaries to workers, rent to be paid for the factory, power costs, fuel expenses and the insurance cost for the factory. You can get the factory cost when you add the factory overheads to the prime cost. The formula for factory cost has been stated below.
Factory Cost = Prime cost + sum of all factory overheads
The overhead costs also consist of the director's fees, building charges, maintenance charges for building, manager salaries, stationery expenses and lighting expenses which shall all come under the office and administration expenses. These office and administration overheads, when added to the factory cost will give you the cost of production of goods. The formula for calculating cost of production has been given below.
Cost of Production = Factory cost + office and administration overheads
The next kind of overheads are the selling and distribution overheads which can include postage expenses, transportation expenses, advertising expenses, marketing expenses and carriage outward. These are known as selling and distribution overheads for the simple reason that they are related to the marketing and promotion of the company products to post better sales numbers and in turn, higher profits. These overheads, when added to the cost of production give the total cost of goods. The mathematical formula for total cost is given below.
Total Cost = Cost of production + selling and distribution overheads
The use of all these overheads is to find the total sales. This can be easily calculated by adding the net profit to the total cost. So, the equation for total sales would be as follows.
Total Sales = Total cost + net profit
This information on overhead costs examples will help you to know how to prepare cost sheet systematically. The cost sheet holds a lot of importance in accounting and hence, you need to be aware of its facts clearly. So, think over these details and use them wisely. All the best!
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