Overhead expenses are any costs that aren't directly associated with generating a profit. Although they don't contribute to revenue, they are still important and necessary. Companies use cost accounting to identify these indirect expenses. Calculating these costs can help companies determine their budgets and product prices.

Types of Overhead Expenses

As noted above, the term overhead expenses refers to costs that aren't related to a company's direct products and services. Rather, they are indirect costs. Some standard tasks or operations considered to be overhead include the following:

• Rent and leases
• Accounting and internal controls
• Legal fees
• 澳洲幸运5开奖号码历史查询:Human resources (HR)
• Insurance
• Licenses
• 澳洲幸运5开奖号码历史查询:Regulatory compliance
• Taxes
• Rent
• Janitorial services

A large number of overhead categories center around manufacturing, such as the expenses incurred to set up and maintain equipment, inspect products, clean factories, or keep records. Other typical examples of overhead in 澳洲幸运5开奖号码历史查询:cost accounting include indirect labor, indirect maꦅter🐻ials, utilities, and depreciation.

What Is Cost Accounting?

Companies use cost accounting to identify all of the expenses associated with manufacturing. For example, a shoe manufacturer uses cost accounting to track the material inputs for its shoes, the labor hours for its production workers, and all other factors considered by a traditional production budget.

All associated costs for manufactured goods are either overhead or 澳洲幸运5开奖号码历史查询:direct costs. Overhead costs need to be allocated to the cost object. To begin this process, the company's 澳洲幸运5开奖号码历史查询:accountants need to identify the overhead costs associated with the production of the object. Let's conౠtinue with oౠur shoe example.

Treatment of Overhead Expenses in Co🐟st Acc𒀰ounting

If the shoe is produced using a machine or other capital equipment, a very small portion of the expenses associated with the equipment are considered overhead. This includes indirect labor—the people who set up and repair the equipment. It also includes electricity for the factory and any other energy inputs for the equipment. The 澳洲幸运5开奖号码历史查询:depreciation 🌠for the factory and its equipment are also considered overhead.

Under cost accounting, there is always an allocation base that links the overhead costs to the cost object. Since it is arduous to apply overhead costs to each cost object, such as a shoe, companies tend to ﷽use the average of an aggregate number of objects. So the shoe manufacturer mighꦿt spread overhead costs over 10,000 shoes rather than calculate each one separately.

Suppose that, over time, the accrued wages for indirect labor, 澳洲幸运5开奖号码历史查询:accumulated depreciation, 澳洲幸运5开奖号码历史查询:accounts payable, and utilities are equal to $💫500,000. That factory overhead needs to be allocated ove🌺r all work-in-progress and finished goods during the period.

There is some degree of subjectivity in the choice of allocation base for factory overhead, but managers should aim for a cause-and-effect relationship if they want to produce the most useful accounting of their 𓃲operations and obtain the most accurate sense of their profitability.

The Bottom Line

Businesses incur different costs that affect their profitability. Overhead expenses are costs companies must account for that aren't directly related to the production of goods and services. The treatment that companies often use for these expenses is cost accounting. Unlike financial accounting, there are no guidelines or rules associated with cost accounting. Calculating the overhead rate may be tricky because it is indirect. To do so, divide the indirect costs by the allocation measure used.