OVERHEAD COST

AND
CONTROL
Group No: 9

Presented By:
Dr.Himanshu Verma( 02 )
Shreshtha Kanojia( 19 )
Dr. Nitin Yeola ( 32 )
Nupur Kaul( 39 )
Shubhra Patankar( 59 )
Symbiosis Institute of Health Sciences, Radhika Iyer( 87 )
Pune
 What is Overhead Cost ?

 Expenses that cannot be conveniently identified with a specific

product or activity.

 Unlike materials and production labor, overhead is an indirect and

invisible part of producing a product or service.

All the expenses over and above the prime cost are known as
overhead charges.

 Overhead = Indirect material + Indirect Wages + Indirect Expenses

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Pune
 Parts of Overhead

 One part relates to the product

 Other part relates to facilities and services maintained for running

the organization

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Pune
 Importance

With the increasing trend towards plant automation, heavy

expenditure is being incurred which cannot be charged directly to
any particular unit .

Can be called as common cost to all units of production.

Overhead expenses being a significant proportion of total cost

ascertainment and control by function and for guidance in certain
managerial decisions by the extent of the variability with
production.

Symbiosis Institute of Health Sciences,

Pune
Allocation and Apportionment of Overheads:
Allocation is the process of identification of overheads with cost
center.

Apportionment is the allotment of two or more cost centers of

proportions of the common items of cost on the estimated basis of
benefits received

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Pune
Common basis for apportionment of overhead

Basis Items of Expenditure

01 Floor area or cubic Rent, rates, taxes, Maintenance of Building
,Depreciation and insurance of building, Lighting
and heating, electricity
02 No. of Employees Supervision, canteen expenses, recreation expenses
03 Capital value Depreciation & Insurance of plant and machinery,
equipments and furniture
04 Value of materials Material handling
05 Horse power Power

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Pune
 Re-apportionment of Overheads

To –reapportion the overhead costs of service departments

to production department is called Re-apportionment of
Overheads

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Pune
 Classification of overheads
Overheads

Function Behavior wise

Element wise wise

Fixed Variable Semi

Administra
Production Selling overheads overheads variable
Indirect Indirect tive Distribution
Indirect overhead overhead overheads overheads Overheads
material labor
Expenses

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Pune
 Element wise classification
Indirect Material cost can be apportioned to cost centers e.g. loose tools,
consumable stores, lubricating oil

Indirect labour cost cannot be allocated but apportioned to cost centers

e.g. salary of foreman, superviser wages of maintenance department,
idle time cost, holiday pay, overtime wages.

Indirect Expenses – e.g. all administration, selling and distribution

expenses
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Pune
 Function wise classification

1. Production or Factory or Manufacturing Overhead:

Production overhead is the total indirect cost associated with
manufacturing activities, the sequence of which begins with
the procurement of materials and ends with the primary
packing of the product
For example,
Indirect materials like lubricants, cotton waste and other
factory supplies
Direct materials of small individual value
Wages of indirect workers
Fuel and power
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Pune
2.Office or Administrative Overhead
It is the total cost of formulating the policy, directing the
organization and controlling the operations of an undertaking
which is not directly related to production, selling,
distribution, research or development activity or function.
Examples:
Office supplies
Printing & stationary
Salaries to office staff
Office rent
Office lighting charges

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Pune
 3.Selling Overhead
 It refers to expenses associated with the marketing & selling activities
Examples:
 Salaries & commissions of salesmen
 Travelling expenses
 Sales office expenses
 Market research
4. Distribution overhead
It is the total indirect cost associated with the distribution of finished
products
Examples:
Packing charges, salaries and wages of distribution staff

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Pune
 Behavior wise classification of Overheads

 Fixed overheads- Which tend to be unaffected by variation in the volume of output,

they remain constant. They are related to periods, and so the fixed costs are known as

the period costs.e.g. the rent of the building or salaries of the office staff

 Variable overheads- Tend to follow the level of activity, the variation may not be

always in the same proportion as the production or sales volume changes, but by the

large there is a linear relationship,between the variable overhead charges ,the cost of

per unit of output tends to remain constant at different levels of output.

e.g. indirect material, indirect labour, power & fuel, lighting and heating expenses

 Semi-variable overheads- Partly fixed and partly variable overhead costs

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Pune
 Absorption of overheads

The process of charging, the overhead to cost units is called as

absorption of overheads

Formula:

Overhead absorption rate = Overheads / Basis for absorption

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Pune
 Types of absorption:

Over absorption
Overheads absorbed in the production are more than the actual
overheads incurred, if actual expenses fall short of the amount
absorbed, there is a said to be an over absorption of overheads.

Under absorption
Production are less than the actual overheads incurred, if actual
expenses exceed the amount of overheads absorbed in the
production, then there is a case of under absorption.

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Pune
 Causes of Under or Over-Absorption of
overheads

Error in estimating overhead expenses

Unexpected changes in the methods of production

Unanticipated changes in the production capacity

Great expansion or reduction in the volume of production

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Pune
 Controlling Overhead Costs

 Overhead Cost Controlling component enables you to plan,

allocate, control, and monitor overhead costs.

 Planning in the overhead area lets you specify standards, which

enable you to control costs and evaluate internal activities.

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Pune
 Measures to Control Overhead Costs

 Control Energy Costs (Energy Efficient Products)

 Inventory Control (avoid excessive/ wrong inventory items)

 Evaluate Insurance (options, policy changes, agents, etc.)

 Renegotiate interest terms
 Renegotiate rental terms
 Decrease working capital
 Implement Quality Control System

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Pune
 Re-evaluate Sales and Marketing Costs

 Study Maintenance Costs

 Decrease Transportation Costs

 Increase Employee Efficiency (Outsourcing, Automation, Task

Consolidation)
 Focus on Profit Margins

 Listen to the Market and Future Trends

 Ask Employees for their Suggestions on Reducing Costs

Symbiosis Institute of Health Sciences,

Pune
Symbiosis Institute of Health Sciences,
Pune