Based on the components or elements, overheads can be classified as indirect materials, indirect labor and other indirect expenses. This classification is also known as classification of overheads according to their nature or sources. Each element of such overheads is described below:
1. Indirect Materials
All materials other than direct ones are indirect materials. Indirect materials do not form the part of the finished products. They can not be identified with or traceable to a particular cost unit or cost centers. They cannot be allocated but can be apportioned to a number of cost units or centers. The cost of lubricants, cotton waste, grease and materials used by service department are some of the examples of indirect materials.
2. Indirect Labor (Wages)
The labor who is not directly involved in production process is called indirect labor and wages paid to such labor are called indirect wages. Indirect labor, however, assists in the production process. The costs of such indirect labor can not be identified and allocated to a particular cost center but can be apportioned to a number of cost centers. The wages paid to watch-men, sweepers, workers of service department, supervisors, and works clerical staffs are the examples of indirect labor or indirect wages.
3. Other Indirect Expenses
The indirect expenses other than indirect materials and indirect labor are called indirect expenses. These expenses also can not be directly traced to any product unit or cost center. Therefore, they are apportioned to a number of cost centers. Some examples of such expenses are rent, insurance, telephone, charges, lighting, office salaries and depreciation.
1. Indirect Materials
All materials other than direct ones are indirect materials. Indirect materials do not form the part of the finished products. They can not be identified with or traceable to a particular cost unit or cost centers. They cannot be allocated but can be apportioned to a number of cost units or centers. The cost of lubricants, cotton waste, grease and materials used by service department are some of the examples of indirect materials.
2. Indirect Labor (Wages)
The labor who is not directly involved in production process is called indirect labor and wages paid to such labor are called indirect wages. Indirect labor, however, assists in the production process. The costs of such indirect labor can not be identified and allocated to a particular cost center but can be apportioned to a number of cost centers. The wages paid to watch-men, sweepers, workers of service department, supervisors, and works clerical staffs are the examples of indirect labor or indirect wages.
3. Other Indirect Expenses
The indirect expenses other than indirect materials and indirect labor are called indirect expenses. These expenses also can not be directly traced to any product unit or cost center. Therefore, they are apportioned to a number of cost centers. Some examples of such expenses are rent, insurance, telephone, charges, lighting, office salaries and depreciation.
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