Overhead costs in industrial accounting and production;
One of the main components of the total cost is manufacturing overhead. In fact, overheads are costs that are not directly involved in the manufacture of goods and product production, and it is not easy to bear these costs for the production of goods or a specific or customized product. related.
You should note that direct costs that can be identified directly, but connecting them to a specific product or to a specific order is not logical and cost-effective, are also sometimes classified as manufacturing overhead. As an example of costs, we can refer to thread in sewing clothes, or glue and nails in carpentry, or essential oil in the food industry, although these costs play a role in the manufacturing and production of products, but their consumption is very small and insignificant, so the consumption They are identified as overhead.
At first, we will mention the examples of overhead costs that are generally present in most production establishments. The most specific overhead costs will be as follows:
1- Depreciation cost of the factory building
2- The cost of renting the factory building
3- Employer’s share of social insurance cost
4- Factory fuel cost
5- Cost of workshop and factory lighting
6- The cost of supervisors’ salaries
If we want to identify the overhead costs in a very simple way, the following device should be used to determine the overhead costs:
When are overhead costs recognized in production?
In production, for reasons that you will learn more about later, overhead costs are identified in 2 times.
1- Before the beginning of the financial period and before the overhead is realized, the overhead is estimated and it is called “anticipated overhead” or “estimated overhead”.
2- After realizing the acceptance of the cost, which is called the actual overhead, it should be noted that sometimes the actual overhead is also recognized at the end of the financial period.
What is the expected overhead and what does overhead absorption mean?
Sometimes, at the beginning of the financial period, overhead costs are predicted and estimated according to experience or by considering possible changes in the price of cost-generating factors, which is called predicted overhead.
After the overhead is predicted with a specific method (which will be explained below), this overhead is identified until the end of the financial period and is the basis for calculating the cost of production, which is called “absorption rate”. Pay attention to the following figure:
You should also know that the only possible method to determine the overhead costs that can be allocated to production in the shortest possible time and as soon as possible for use in management and estimating inefficiency and identifying irrational changes or balancing the cost price of a product unit from one month It is possible to the next month by using the overhead absorption rate, which we will discuss further in this field.
continues
What we will say next:
What are the causes of forecasting and estimating overhead?
How are overhead costs classified?
Mehdi Koh Soltani (financial services, accounting, financial and tax consultant):
The group of accountants and auditors of Tabriz
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