What Are Overhead Costs

These expenses are usually referred to as operating expenses which are ongoing. For example rent, wages, electricity etc. It is termed so because of the grouping done by a company for continuous usage. They include all costs that come under the income statement except a few like direct labor, direct material, legal fees etc. These are sometimes termed as manufacturing costs.

Under the group of manufacturing head it is classified into two groups:

Manufacturing Overhead: it is often called factory overhead, where in indirect costs that are incurred when a product is actually manufactured. It also includes direct costs such as direct labor costs that are incurred in manufacturing the product. Manufacturing costs include cost of electricity which is used to run the factory, factory machinery depreciation expenses etc.

Non Manufacturing Overhead: these are referred to as administrative expenses. In accounting words these are costs that include in selling the products that are manufactured. For example cost of advertisement of products, marketing costs etc. In simple words these are the expenses that actually go into the income statement.

There are a few methods of allocating non manufacturing overhead costs. These costs are usually allocated internally so that it helps in decision making. When an organization goes for this kind of allocation, it has to keep in mind the following:

  • Understand the activities makes the cause for non manufacturing costs
  • Cost of these activities should be measured
  • Check the customers for whom these products are manufactured.
  • Allocate these costs to the customers identified.

Since these costs are ongoing for a company, it has to also see that it does not spend too much on such costs. Hence the company also plans for cost cutting in order to achieve the required goals. Here are a few measures the company can take to reduce these overhead costs.

  • Get things automated by going paperless. For example important receipts can be generated through computers and stored on disks for future reference.
  • The company can also hire a bookkeeping professional who will make the company understand the tax deductions so that it can save money and time.
  • The company must analyze what its needs are?  For example instead of going in for costly advertisement, it can attach itself to many websites that are around these days.
  • The organization can decide on the kind of office space it wants that is if you really need a big space or in the heart of the city or can some one work from home etc.
  • When ever a new employee needs to hire care should to taken to see that the new entrant is multi talented instead of hiring the same kind of employee.