![]() If an account falls into this category, its monthly total is added to a cost pool, from which the total overhead cost is allocated to a cost object (usually inventory). However, it is is possible to ignore overhead costs for the pricing of special one-time deals, where the minimum price point only has to exceed the relevant direct costs.Īccounts are usually designated as being overhead by accounting policy, which is rarely changed. Doing so allows it to earn a profit on a long-term basis. Overhead and direct costs, when combined, comprise all of the expenses incurred by a company.Ī business should set its long-term product prices at levels that account for both its overhead costs and direct costs. The other type of expense is direct costs, which are those costs required to create products and services, such as direct materials and direct labor. Examples of overhead are accounting and legal expenses, administrative salaries, depreciation, insurance, licenses and government fees, property taxes, rent, and utilities. The clothier must pay overhead to create the proper retail environment for its customers. ![]() For example, a high-end clothier must pay a substantial amount for rent (a type of overhead) in order to be located in an adequate facility for the sale of clothes. Overhead is still necessary, since it provides critical support for the generation of profit-making activities. Thus, overhead costs do not directly lead to the generation of profits. Overhead is those costs required to run a business, but which cannot be directly attributed to any specific business activity, product, or service.
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