What is meant by direct overheads? Does allocated overheads mean direct overheads?

0
994

First of all we need to understand the definitions of overheads, direct expenses, allocation and apportionment itself in order to explain the answer of this question.

Overheads mean such costs and expenses that were incurred during the production process but it is impossible to identify or trace such costs back to a particular product or a cost center. In simple words it is difficult to the level of impossibility to determine what amount of cost was incurred in producing one unit or the cost incurred in one cost center. Overheads include such material and labour costs which cannot be charged directly to cost unit or cost center and thus called indirect material and indirect labour costs respectively.
Usually overhead costs are also termed as “Indirect costs” or “factory burden” or simply “burden”.

Direct expenses mean such costs that can be traced back to a particular product or cost center but cannot be categorized as either direct material or direct labour.

Allocation is a mathematical process by which we can allocate such costs to a particular product or cost center which can be identified with such product or cost center.

Apportionment is a mathematical process by which we divide such costs among products and cost centers which we cannot charge directly to a particular product or a cost center because it is either impossible or economically convenient.

By looking at above definitions now we can understand that such expenses that can be allocated are simply direct expenses or direct costs and the ones we apportion are simply indirect costs or indirect expenses.

There is NO such thing as “direct overheads”. Overheads are always indirect production costs.

SHARE
Previous articleWhat is conversion cost?
Next articleWhat is Private ledger?
Teaching professional business subjects to the students of FIA, ACCA, CIMA, CA etc. He also found ACCA LIVE which is Pakistan's first portal to provide online classes and distance learning solutions to FIA/ACCA students. At PakAccountants.com he is busy making study material for different qualifications. Beside writing articles he answers questions asked using ASK TUTOR!

LEAVE A REPLY