Cost overheads are costs that can not be directly attributed to the production of a product or service. This is the type of expense or expense incurred on all types of companies. Overhead costs play an important role for the survival of a business or company.
Overhead costs are all costs on the company’s Income Statement outside the costs directly related to the company’s production activities. As a simple illustration, not including the cost of inventory purchases o verhead because the cost of overhead is directly related to the company’s production activities. While the cost of renting a factory building includes overhead costs . This is because the company still has to pay the rent whether the company does or does not carry out a production activity.
Example of Overhead Costs
Examples of overhead costs can vary depending on the type of company. The cost of overhead that occurs in trading companies will differ from the manufacturing company. Types or examples of overhead costs in general are the costs of rent, utilities, insurance, office equipment and others.
Benefits of Overhead Costs
· Know the Cost Allocation Details
You will know the details of each allocation of funds that will be issued and help in making a budget for future overhead costs so that the making will be more planned and can avoid excessive expenditure.
· Determine the Price Right
By knowing how much overhead they have can also influence in determining the right product price. Calculations regarding these costs need to be included in determining prices to avoid loss. Especially if overhead costs must be incurred regardless of whether production is entering a “fertile” period or not.
· Oversee Expense Costs
The company will be able to oversee the costs to be incurred. By recording and calculating overhead costs will help you in overseeing expenses in the business as a whole. It can also be seen whether the expenditure plan is efficient. From there it will be visible, whether the cost of overhead, it turns out the amount is too large when compared to the expense of other. That way, you can make some adjustments and spend even more in control.
Overhead Cost Category
The cost of overhead can be divided into three categories. Each category has examples of overhead costs that are different from other categories. The three categories are Fixed Overhead Costs , Variables and Semi-Variables.
a. Fixed Overhead Costs ( Fixed Expenses)
Whatever your sales volume, overhead costs must still be met every month . Examples of fixed overhead costs are:
- Payment of rent or mortgage.
- Depreciation of fixed assets (such as cars and office equipment).
- Labor costs for managers, accountants and similar employees. In essence, these costs are addressed to employees outside of employees who are assigned directly to production activities.
- Insurance expense.
- Membership fees.
- Legal services or accounting consultancy fees.
These costs do not change, regardless of whether the company’s sales activities are up or down.
b. Variable Overhead Costs
Variable overhead costs are costs that change or fluctuate over time. These changes depend on the volume of sales activity and other factors. Such as promotion efforts, seasonal changes, economic conditions and other things that clearly can not be predicted regularly from time to time. In essence, variable overhead costs fluctuate and never stay flat in a period. Examples of variable overhead costs are marketing costs, telephone costs, office supplies and others.
c. Semi-Variable Overhead Costs ( Variable Expenses )
This cost is flexible compared to variable overhead costs that are always changing every time. Sometimes in certain periods of time an overhead can occur permanently. However, in the future due to external factors or the company’s operational activities which increase or decrease, the overhead costs will change as well. It also means that semi-variable overhead costs do not change over time and do not have to be paid at all times . One example is printer ink as office supplies. Sometimes an accountant might use a printerconstantly from month to month. Because at the end of the year the company must close its books, accountants use printers more intensely than before.
