Overhead

Definition

Overhead refers to the indirect costs associated with manufacturing a product that cannot be directly traced to a specific job. These costs include items like utilities, rent, and salaries of supervisors.

5 Must Know Facts For Your Next Test

1. Overhead is one of the three major components of product costs, alongside direct materials and direct labor.
2. It includes both variable and fixed costs that support production but are not directly tied to individual jobs.
3. Overhead must be allocated to each job using a predetermined overhead rate based on estimated costs and activity levels.
4. Common bases for allocating overhead include machine hours, direct labor hours, and direct labor cost.
5. Accurate allocation of overhead ensures proper costing of products, aiding in pricing decisions and financial analysis.

Review Questions

• What are some examples of costs included in manufacturing overhead?
• Why is it necessary to allocate overhead to individual jobs?
• What are common bases used for allocating overhead?

Related terms

Direct Materials:

Raw materials that can be physically and directly associated with the finished product.

Direct Labor:

The work of employees that can be physically and directly associated with converting raw materials into finished goods.

Predetermined Overhead Rate:

A rate used to allocate manufacturing overhead to individual jobs, calculated by dividing estimated total manufacturing overhead by an estimated total amount of the allocation base.