What do you understand by term Overheads? What are stages and methods involved in distribution of overheads methods of absorption of overheads ? Explain treatment of under and over absorption of overheads
Overheads comprise of indirect materials, indirect employee costs and indirect expenses which are not directly identifiable or allocable to a cost object in an economically feasible way. Overheads are the indirect costs that are incurred during the course of manufacturing an item, rendering a service or running a department but cannot be debited directly or wholly to an item, services or departments. Suppose an organization produces three products: A, B and C. Material, labour and other direct expenses which an organization used for each product individually are the direct costs. Besides these, there are other expenses like rent, helper wages, salaries of office staff, rent of showroom; salaries of salesman etc. which are incurred for the benefit of the organization as a whole but cannot be charged separately for each product are overheads. Overheads are to be classified on the basis of functions to which the overheads are related, viz - Production overheads - Administrative overhea