The overhead expenses classification functional classification

Overhead expenses are classified with reference to major activity divisions of a concern; it is called functional classification of overhead. This classification is necessary for the segregation of the cost of each of the principal functional division of the concern and having separate method of accounting and control for the diverse nature of expenses in each division. The main groups forming the basis of the classification are :

• Manufacturing overhead
• Administration overhead
• Selling overhead
• Distribution overhead
• Research and development overhead

Manufacturing or works overhead is the indirect expenses of operating the manufacturing divisions of a concern and cover all indirect expenditure incurred by the undertaking from the receipt of order until its completion ready for dispatch either to the customer or to the finished Goods store. Administration overheads are indirect expenditure by nature and incurred in formulating the policy, directing the organization, controlling and managing the operation of an undertaking which is not related directly to a research, development, production selling activity of function. It consists of all expenses incurred in the direction, control and administration of an undertaking. Selling overheads is the cost of seeking to create and stimulate demand and of securing orders and comprises the cost of soliciting and recurring order for the articles or commodities dealt in and of efforts to find and retain customer. Distribution overhead is the expenditure incurred in the process which begins with making the packed product available for dispatch and ends with making the reconditioned return empty package. And research and development overhead is cost of searching for new and improve products, new applications of materials or product, and new applications and improved method.

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