# Overheads — Concept and Types
## What are Overheads?
All Indirect Material, Indirect Labour, and Indirect Expenses that cannot be directly linked or traced to a specific product are bundled together under one umbrella called Overheads.
They are 'overhead' in the sense that they hang over all products and must be allocated/apportioned rather than directly charged.
## Four Functional Categories
Overheads are further sub-categorised by function — i.e., where in the business they arise:
1. Factory Overhead (also called Production / Works Overhead)
2. Administration Overhead (Office Overhead)
3. Selling Overhead
4. Distribution Overhead
This lesson covers the first two; selling and distribution are taken up separately.
## (i) Factory Overheads
Definition — All indirect costs incurred in the factory (i.e., on the production floor or in support of production).
Examples:
- Depreciation of machine
- Depreciation on (factory) Building
- Repairs of plant
- Insurance of plant
- Primary packaging (the packaging needed to make the product saleable, e.g., a toothpaste tube)
- Godown expenses
- Administration OH that is related to production (e.g., factory manager's salary)
Note — Primary packaging is part of factory overhead because the product isn't complete without it. Secondary packaging (for transport) goes to Distribution OH.
## (ii) Administration Overheads
Definition — All indirect costs incurred in the office — i.e., for general management of the business.
Examples:
- Office Staff Salary
- Director's Salary
- Depreciation of office Building
- Audit expenses
- Repairs of office Building
- Stationery
- Rent of office Building (excluding finance lease — because finance lease is treated as a financing arrangement, with interest going to finance cost rather than admin OH)
## Why the 'Factory vs Office' Cut Matters
The split determines how cost flows through the cost sheet:
- Factory OH is absorbed into product cost (becomes part of Works Cost / Cost of Production).
- Admin OH is typically charged after Cost of Production (becomes part of Cost of Goods Sold or treated as period cost depending on the question's instruction).
Getting an item into the wrong bucket distorts both inventory valuation and the cost sheet structure.