classify overheads with examples
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In business, overhead or overhead expense refers to an ongoing expense of operating a business. Overheads are the expenditure which cannot be conveniently traced to or identified with any particular cost unit, unlike operating expenses such as raw material and labor. Therefore, overheads cannot be immediately associated with the products or services being offered, thus do not directly generate profits. However, overheads are still vital to business operations as they provide critical support for the business to carry out profit making activities. For example, overhead costs such as the rent for a factory allows workers to manufacture products which can then be sold for a profit. Such expenses are incurred for output generally and not for particular work order; e.g., wages paid to watch and ward staff, heating and lighting expenses of factory, etc. Overheads are also very important cost element along with direct materials and direct labor.Overheads are often related to accounting concepts such as fixed costs and indirect costs.Overhead expenses are all costs on the income statement except for direct labor, direct materials, and direct expenses. Overhead expenses include accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities.
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Overheads
1. Functional classification of overhead
a) Manufacturing overhead- Examples are Electricity charges, stationery, postage.
b) Administration overhead- Examples are office rent, light, and salaries of clerks.
c) Selling overheads- Examples are Salesmen's salaries and commission, showroom expenses.
d) Distribution overhead- Examples are Warehouse rent, Warehouse staff salaries.
e) Research and development expenses.
2. Element Classification
a) Indirect materials- Small tools for general use, lubricating oil.
b) Indirect Labour- Examples are maintenance workers, trainees, apprentices.
c) Indirect expenses- General manager's salary, power and fuel.
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