What are Overheads?
What do we mean by overheads? overheads are nothing but expenditures which you cannot trace or identify with any particular cost or product. This is an expenditure which is incurred but you cannot trace this expenditure or identify this expenditure with any particular cost unit . It means that these expenditures or incurred generally.We can say they are incurred for common purpose. They are not incurred for rendering a particular service or particular product but incurred for general output. let’s take an example you pay salary to your security staff so this salary paid to security staff is not something confined to a particular product or a particular service. But it is incurred in common and say you're incurring some lighting expenses Heating expenses of factory.All these are all going to be common expenses so overheads are very important cost. When we arrive at the total cost we have to factor various costs and in that overhead occupies very important place along with direct material cost and direct labour cost. Many times in manufacturing concern this overhead cost would be greater than direct material it may also sometime be greater than direct labour and in some occassions it will be greater than aggregate of direct material and direct labour costs .Because of this reason Overheads is very important when we workout what is the total cost incurred by an organisation.If you don't consider this cost while arriving at the cost of a job then probably we will be making a big mistake. so what you have to understand is overhead represents expenses that have been incurred in providing certain ancillary facilities or for services which actually facilitate or make it possible for carrying out the production process so overheads is basically incurd to facilitate your process .Sometimes it may not be directly related to facilitating also but still if you don't think that expenditure you may not be able to run your organisation for some of the other reasons so what we have to understand is overheads are not only incurred in production process but it is also included in administration process it is also included in selling and distribution processes .so understand overheads are basically expenses which you cannot directly trace with particular product or particular process but it is incurred in common or in general to facilitate all the processes in the organisation.