Question

QUESTION 5

Explain THREE (3) examples of overhead costs.

Answer 1

Definition of Overhead Cost : Overhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production; and examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.

Some of the examples of Overhead Costs include Advertising Cost, Insurance Cost, Rent, Utilities, Depreciation, Spoilage cost, Postage & Stationery Expenses etc.

Let’s understand the same with the help of a Numerical example:

ABC Limited has incurred a total overhead cost of Rs 120000 and spent 24000 direct labor hours (10 workers employed for 48 hours per week for 50 weeks during the year)in a production of its three product lines A, B, and C. ABC is trying to work cost one its product line A. Details of which are as follows:

Direct Labor Hour Rate= Rs 120000/24000.

= Rs 5.00 per hour