# Core Theory Topics on Overheads
## 1. Advantages of classifying overheads into Fixed and Variable
| Advantage | Why it helps |
|---|---|
| Controlling expenses | Fixed costs are policy-related and stay constant regardless of output; variable costs move with activity. Separating them shows which costs can be controlled by adjusting output. |
| Preparation of (flexible) budget | Segregation lets you estimate cost at different activity levels and compare against actuals — i.e., build a flexible budget. |
| Decision making | Many decisions — pricing in tough times, make-or-buy, shut-down-or-continue — need fixed and variable costs separated first. |
## 2. Advantages of Departmentalisation (allocating overheads across departments)
| Advantage | Explanation |
|---|---|
| Better estimation of expenses | Some costs are estimated more precisely when tied directly to a department. |
| Better control | Tracking expenses per department reveals over-spending — comparing what should be spent vs what is. |
| Ascertainment of cost for each department | A job's cost needs the expenses of every department it passes through, ensuring correct allocation of indirect expenses. |
| Suitable method of costing | Different departments can use different costing methods (e.g., batch costing for parts, output costing for assembly). |
## 3. Some other bases of apportioning overhead costs
| Basis | How it works / caution |
|---|---|
| Analysis or Survey of Existing Conditions | Apportion after surveying expenditure — e.g., lighting split by number of light points per department. |
| Ability to Pay | Distribute on the income of the paying department (taxation-like) — e.g., sales expenses on sales volume per territory. Caution: can be inequitable, as it may not reflect the actual effort to sell. |
| Efficiency or Incentives | Distribute on pre-determined levels of production/sales. If actual output exceeds plan, cost per unit falls; if it falls short, cost per unit rises. |