OVERHEAD COSTS Literature review Example | Topics and Well Written Essays - 1500 words

OVERHEAD COSTS - Literature review Example The cost of direct labor, direct material and manufacturing overhead must allocate to each and every unit produced. This is done to value the inventory and the costs of goods manufactured, and then report them according to the general accounting principles. Manufacturing overhead may include costs like electricity which is used to operate the factory equipment, depreciation of factory equipment, salary of indirect labor and all the cost related to production except direct labor and direct material. Nonmanufacturing overhead includes activities related to the selling and administration departments. These costs are not included in the cost of goods sold as they are taken directly in the income statement as expense. Nonmanufacturing overhead includes cost such as freight charges, property tax, maintenance of equipment and salary for employees of selling and administrative department etc. Although the nonmanufacturing overhead is not included in the cost of goods sold but they are actual ly the part of the combined cost incurred in the manufacturing of a product. LITERATURE REVIEW Don R. Hansen, M.M.M.L.G. (2009) Cost Management: Accounting & Control, Cengage Learning. Don Hansen defines overhead cost as all the production costs other than direct labor and direct material that are incurred during production process. ... The examples for overhead costs are depreciation on equipment and buildings, maintenance of equipment and supplies, taxes etc. Supplies are products that are used in the manufacturing of the product but are not the part of the final product or the services. Dishwasher detergents used in restaurants and oil lubricants used in production are the example of supplies. Direct material that is not the main or significant part of the final product is also included in the overhead costs under the category of indirect cost. An example of indirect material can be the glue used in the manufacturing of toys. The cost for the overtime for direct labor is also assigned to the overhead category. This is because no production has been identified that can be marked as the cause for overtime. Overtime cost is an indirect cost and therefore it is allocated to all the departments (DON R. HANSEN, 2009). Don Dayananda, R.I.S.H.J.H.P.R. (2002) Capital Budgeting: Financial Appraisal of Investment Projects, Cambridge University Press. Don Dayananda, Richard Irons, Steve Harrison, John Herbohn and Patrick Rowland in their book â€Å"Capital Budgeting: Financial Appraisal of Investment Projects† have stated two examples of overhead cost i.e. utilities (electricity, water and gas) and executive salaries. Cost accounting is all about allocating the overhead cost to their appropriate production units. In product evaluation the main issue is the identification of the incremental overhead cost rather than the allocation of overhead. On the basis of the overhead cost and the incremental overhead cost the firm decides to accept or reject proposals of any project. There are often times when there is not even a single project to which the overhead cost can be allocated. In