Concept Of Overhead Costs

Management courses, commerce stream and engineering or architectural courses are often pursued with the intention of starting business units or consultancy services and not just for job-seeking. Naturally aspirants have to be prepared for business when they step out to make a career and must be familiar with financing, accounting and marketing along with management and related hard skills.

Finance and accounting are subjects that include a number of complicated concepts and it is necessary for students to understand them thoroughly. One such core concept is overhead costs. One cannot do business if one has no knowledge of overhead costs. The profit-loss analysis, marketing strategies, overall business plan ROI will all be affected seriously if one cannot calculate overhead costs. The business will never lead to profits or succeed.

When you manufacture a product, the cost price is calculated by adding the cost of the raw material, the labour charges, electricity charges etc. If profit is charged on the cost price arrived at, one is sure to be doomed. There are other costs which may not be very conspicuous but which are incurred anyway. They can be pretty substantial and omitting them from the cost price of an article will lead to loss.

Overhead costs go unnoticed because they do not directly affect revenues. However, business cannot operate without certain functions. For example, you may have to take a representative party of prospective buyers out to dinner and give them an expensive treat. One forgets small matters like insurance, water charges, utilities, repairs, communication, advertising, legal issues etc. These expenses are necessary for day-to-day running of routine business. Together, they add up to a substantial amount. Certain things cannot be predicted. For example, there may be some accident at the workplace, a fire or some terrible disaster, may be workers will get injured and will have to be given treatment. One just never knows how funds will be spent up.

All these expenses are covered under overhead costs.

Overhead costs are not fixed costs. Whether there is production regularly, or whether it stops for some while for any reasons whatsoever, one cannot stop spending on overheads. Sometimes, they add up to more than the cost price of an article calculated directly. They are quite a burden to any business and cannot be neglected. They help to monitor and control a business unit regularly. In short, these overhead costs indirectly affect revenue.

It is convenient to calculate the overhead costs on a monthly basis. To get an idea about efficient utilization of resources, overhead costs can be calculated as a percentage of labour costs.

Difficulties In Understanding The Concept Of Overhead Costs

The concept itself is rather difficult to understand.

It is new for students who come from non-commerce backgrounds like Arts or social sciences.

Questions and assignments are practical and application based where students are required to identify and segregate direct costs and overhead costs. Without understanding the concept thoroughly, students are unable to decide which costs are overhead costs.

Costs which directly affect revenue in one type of business can be considered as overhead costs in another type of business. This makes matters very confusing for learners.

The assignments are many and time given to complete them is not sufficient. Moreover, students have to complete assignments for all subjects simultaneously. They cannot do justice to overhead costs assignments in the circumstances.

Teachers in colleges often have to rush through the syllabus so they cannot explain each and every concept properly. Sometimes, they do not give sufficient and appropriate examples. Students fail to understand the concept and remain in darkness.

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