Overhead costs

Definition

Overhead costs are indirect expenses associated with manufacturing that cannot be directly traced to a specific job or product. These include utilities, rent, and salaries of support staff.

5 Must Know Facts For Your Next Test

1. Overhead costs are allocated to jobs based on a predetermined overhead rate.
2. These costs are essential for accurate job costing and pricing decisions.
3. Overhead can be classified into fixed costs (e.g., rent) and variable costs (e.g., utility bills).
4. In job order costing, overhead is applied to each job using a cost driver such as direct labor hours or machine hours.
5. Accurate estimation of overhead costs helps in better financial planning and control.

Review Questions

• What is the role of predetermined overhead rates in allocating overhead costs?
• How do fixed and variable overhead costs differ?
• Why is it important to accurately estimate overhead costs in job order costing?

Related terms

Direct Costs:

Costs that can be directly traced to a specific job or product, such as raw materials and direct labor.

Cost Driver:

A factor that causes overhead costs, used to allocate these costs to jobs or products.

Predetermined Overhead Rate:

A rate used to apply estimated overhead costs to jobs, calculated before the period begins based on estimated total overhead and estimated cost driver activity levels.