Overhead expenses are productive and non productive expenses which are not directly related to the work or business. These expenses can be broadly classified into three separate categories: indirect labour, indirect materials, and other miscellaneous costs like taxes, depreciation, repairs, utilities, supplies, indirect labour and insurance. In other words, an overhead expense forms a part of the total cost of running, staffing and maintaining a business. Very often, the exact amount of overhead expense that need to be applied cannot be gauged at the time a product is manufactured or service is provided.
Hence it is important to compute and allocate the overhead expenses at the budgetary phase itself so that the true cost to the goods or services can be applied. In a business which produces more than one product, a standard overhead rate cannot be determined to all products. The accountant has to rely on an activity base which can calculate the allocation of overhead expenses to finished products. The activity bases which are normally used are direct labour hours, direct labour expenses, employee count, gross profit estimate and machine hours.
Hence it is important to compute and allocate the overhead expenses at the budgetary phase itself so that the true cost to the goods or services can be applied. In a business which produces more than one product, a standard overhead rate cannot be determined to all products. The accountant has to rely on an activity base which can calculate the allocation of overhead expenses to finished products. The activity bases which are normally used are direct labour hours, direct labour expenses, employee count, gross profit estimate and machine hours.
