## Overhead — Meaning and Classification
### What Is Overhead?
Overhead (OH) = Cost that cannot be easily identified with and directly related to a particular cost centre.
$$\text{OH} = \text{Indirect Material Cost} + \text{Indirect Labour Cost} + \text{Indirect Expenses}$$
Note: OH is also called indirect cost. The moment a cost is directly traceable to a product or cost centre, it is a direct cost, not an overhead.
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### Classification 1 — By Behaviour (Variability)
| Type | Behaviour | Example | Key Rule |
|---|---|---|---|
| Fixed Overhead | Does NOT change with production volume (within installed capacity) | Factory rent, Factory manager salary | Fixed OH per unit decreases as production increases |
| Variable Overhead | Changes in direct proportion to production volume | Factory stationery consumed | Total VC increases/decreases exactly with output |
| Semi-variable Overhead | Part fixed, part variable — changes but not in proportion | Telephone bill (fixed line rental + variable call charges) | Must be split into fixed and variable components for analysis |
> Memory tip: Fixed OH is about TOTAL (stays constant); Variable OH is also about TOTAL (moves with output). The PER UNIT story is the reverse — fixed OH per unit falls as output rises, variable OH per unit stays constant.
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### Classification 2 — By Function
| Function | Description | Example |
|---|---|---|
| Production / Factory OH | OH incurred by production dept in making goods | Salary of factory manager |
| Administration OH | OH incurred in general management of the org | Salary of Managing Director |
| Selling OH | OH incurred in creating demand and getting orders | Rent of sales office |
| Distribution OH | OH from packing the product for despatch to reconditioning returned empty packaging | Salary of delivery driver |
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### Classification 3 — By Element
| Element | Definition | Example |
|---|---|---|
| Indirect Material Cost | Material cost not directly traceable to a cost centre | Stationery used in factory |
| Indirect Labour Cost | Labour cost not directly traceable to a cost centre | Factory manager's salary |
| Indirect Expenses | Expenses not directly traceable to a cost centre | Factory building rent |
> Note: The same cost can be classified under multiple schemes simultaneously. Factory manager's salary is: Fixed OH (by behaviour) + Production OH (by function) + Indirect Labour (by element).