Overhead costs refer to those costs that are not directly related to the production and manufacturing process of a company. Therefore, these are the indirect costs that the company needs to pay whether there is any production. Some business owners (Also see Characteristics of Successful Business Owners) find it challenging to account for the expenses related to their business activities. If they do not find a way to solve this problem, this will eventually lead to messy books, especially the calculations that are related to the calculation of costs. Hence, to avoid such a situation from happening, business owners may consider seeking help from an accounting firm in Johor Bahru.
Overhead costs are the costs the company has spent on indirect labour, indirect material, as well as other operating expenses like the rentals, utilities and so on. These costs are related to the daily business operations that the company has carried out. Yet, it is unable to charge these expenses (Also see Direct Expenses and Indirect Expenses) directly to any of its products or services offered to the customers. This means that the indirect costs cannot be determined with a particular cost per unit of a product or a service.
Indirect costs vary among different companies. They play an essential role in ensuring that the business (Also see Questions You Should Answer Before You Start Your Own Business) can run smoothly. They may be classified as fixed costs or variable costs depending on their behaviour. The former will not be affected by the level of output while the latter will vary with the production levels. Some examples of fixed costs include rental and depreciation, and examples for the second are costs incurred for shipping, production supplies and so on.
If we classify the overhead costs according to their functions, there are a few different types of overhead costs. Manufacturing overheads include all kinds of indirect costs like indirect labour, indirect material, as well as other indirect expenses. These are the costs incurred during the manufacturing processes. Another type of cost is the selling and distribution overheads. These are the costs incurred when the company markets and sends the products. Administrative overheads, on the other hand, refer to the costs that the company has incurred on administrative and accounting tasks. These are the costs that it would not be able to allocate to each unit of its products.
To allocate the overhead costs, business owners need to select an approximate cost centre. They should consider a few factors when they are doing this, which include information about the nature of the cost as well as the controls required. Then, they need to determine the cost that is attributable to a specific cost centre. The next step is cost apportionment, where they should allocate the costs in different cost centres according to the estimated benefits that each cost centre will receive.
Business owners should always keep a tight grip on the overhead costs, and they should make an effort to lower these costs. By doing so, the company will be able to price the products and services it provides more efficiently. Thus, this increases the competitiveness of the business (Also see How Can Bookkeeping Services Indicate Business Health?) when compared to its competitors.