The upcoming discussion will update you about the difference between expenses and overheads.
Direct expenses, otherwise known as chargeable expenses, other than direct material cost and direct labour cost, which are directly incurred on a specific cost unit. They form part of prime cost because they are incurred directly on a specific cost unit.
Features of Direct Expenses:
i. Direct expenses are solely incurred on a particular cost unit or cost centre. Benefit of incurring direct expenses is available only for a particular cost unit but not for others.
ii. Direct expenses vary in direct proportion with production volume.
iii. The proportion of direct expenses to total cost is very less.
iv. Direct expenses can be controlled easily when compared to indirect expenses.
v. The direct expenses can be identified with the total cost of production.
The following are some of the examples of direct expenses:
i. Carriage inward, import and octroi duty etc. paid on materials purchased.
ii. Primary packing materials.
iii. Cost of patents and Royalty paid.
iv. Travelling expenses on securing an order.
v. Surveyor’s fee
vi. Sub-contract cost
vii. Cost of spare parts
viii. Cost of special drawing, design, etc.
ix. Cost of special tools or equipment hired
x. Maintenance charges of such tools or equipment.
Indirect expenses are those expenses other than indirect material cost and indirect wages which cannot be conveniently identified with and wholly allocated to any particular cost centre, but can be apportioned to or absorbed by two or more cost centres or cost units.
(a) Rent, rates, insurance, lighting and heating, power, depreciation etc. incurred in the various production and service sections of the factory.
(b) Rent, Rates, insurance, lighting and heating, postage and telegram, printing and stationery telephone charges, fax charges, bank charges, legal charges, audit fees etc. incurred in the administrative division of the concern.
(c) Rent, rates, insurance, lighting and heating, transport charges, advertisement, publicity, bad debts, etc., incurred in the selling and distribution division of the concern.
Direct Expenses Vs. Indirect Expenses:
Direct expenses differ from indirect expenses in following respects:
i. Direct expenses are the part of prime cost, whereas, indirect expenses are not.
ii. Direct expenses vary in direct proportion of output, whereas indirect expenses do not.
iii. The benefit of incurring direct expenses with the completion of a job is not extended to other job, whereas the benefit of incurring indirect expenses is extended to other jobs also.
iv. The direct expenses can be identified with the total cost of production, whereas it is not possible in case of indirect expenses.
v. Direct expenses can be allocated whereas indirect expenses are to be apportioned.
vi. Direct expenses can be easily controlled, whereas indirect expenses cannot be easily controlled.
Though direct expenses constitute only a small portion to the total cost of production it should not be allowed to go unchecked. Care must be taken to see that these expenses do not exceed the pre-determined amount. Standard cost can be fixed for direct expenses and the actuals can be compared with standard cost to know variances. In case of adverse variance, it should be analysed and reported for taking remedial measures.
Overhead constitute one of the important elements of the cost of production. The production of goods or services of every kind involves incurring of additional costs apart from the three prime cost elements. Such expenses which are incurred over and above the prime cost elements are known as overheads.
Various other names of overheads are:
(a) On cost
(b) Supplementary costs, and
(c) Non-productive costs, etc.
Unlike prime cost elements, the overheads cannot be easily identified with finished product. As such overheads cannot be allocated but can be apportioned to finished goods only on an equitable basis. Overheads are incurred with inside and outside the production department. The amount of overheads incurred depends upon the nature of industry and as such it cannot be precisely estimated as a percentage to total cost. However, it is inevitable to incur overheads in all factories.
The term ‘overhead’ has been defined as follows:
i. The ICMA terminology defines overheads as the “aggregate of indirect material cost, indirect labour cost and indirect expenses.”
ii. “Overheads are those costs which do not result from the existence of individual cost-units.” —Harper
iii. “Overhead costs are the operating costs of a business enterprise which cannot be traced directly to a particular unit of output.” —Blocker and Weltmer