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Accounting for overheads

What are overheads?

Overheads (also referred to as indirect costs) comprise indirect
material, indirect labour and indirect expenses.

An overhead cost is defined as ‘expenditure on labour, materials or
services that cannot be economically identified with a specific saleable
cost unit’.

1.1 Types of overhead

Overhead costs may be classified according to the function within the organisation
responsible for incurring the cost. Examples of overhead cost classifications include

 production overhead concerned with the physical production of the product

 selling and distribution overhead concerned with the selling and distribution
of the finished product

 administration overhead concerned with the general administration of the
organisation.

It is usually possible to classify the majority of overhead costs in this way, but some
overhead costs relate to the organisation generally and may be referred to as
general overhead.

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