Overhead costs may be defined as costs incurred in the course of manufacturing a product, providing a service or running a department which cannot be traced directly to the product, service or department. It is the total cost of indirect materials, indirect labour and indirect expenses.
Overheads may be divided into production overheads, administration overheads and selling and distribution. With this, they may be charged to production cost centers i.e. making, finishing and packing departments, service costs centers, for example, maintenance and power generation or other non-production cost centers for example administration, selling and distribution. Production overheads for instance, are added to the prime cost in order to obtain the total production costs.
This chapter focuses on how these overhead costs are charged to production and non-production
departments so as to determine the total cost incurred by every department in the organization.