Overhead is the total cost of indirect materials, indirect labour, and indirect expenses.
Production overhead cost is allocated to each unit of production through allocation, apportionment, and absorption.
Cost Centre Classification
- Production cost centres.
- Service cost centres
Provide support that facilitates the activities of production departments. - Process cost centres.
Allocation
The allotment of all the items of cost to cost centres or cost units. An expense directly identifiable with a specific cost centre is allocated to that centre.
Apportionment
The allotment of proportions of items of cost to cost centres or cost units, based on an equitable basis.
Basis of Apportionment
- Floor area occupied
Rent, rates and taxes, lighting and heating, insurance and depreciation of building, air conditioning. - Capital value
Insurance and depreciation on plant and machinery, maintenance of plant and machinery. - Number of employees
Welfare expenses, time-keeping, payroll office, canteen, recreation, supervision, medical expenses. - Machine hours
Repairs and maintenance of plant and machinery, power. - Value or weight of materials
Store keeping expenses. - Truck mileage or tonnage or number of packages
Transport service expenses.