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 Overhead Costs

Definition

Costs that cannot be assigned directly to cost objects are overhead costs , and are divided into direct and indirect overhead costs. It is possible to assign indirect overhead costs to cost objects, but would be too time-consuming.

Use

The percentage of overhead costs in total costs has risen sharply in recent years. The number of workers employed in overhead cost areas grew from 25-30% in the 1950’s to more than 50% today. Not only have overhead costs increased in service organizations, which treat most of their costs as overhead, but also in manufacturing. A survey in the United States showed that there was approximately 80% overhead costs in the machine and electronics manufacturing industries. In the manufacturing industry, increases in overhead cost often caused by a structural change in the organizational value-added structures, which normally changes the organizational cost matrix. Therefore, the increased use of automation results in a rise in overhead cost, with a negative effect on directly assignable production costs. Overhead cost has increased because organizations cannot assign the cost of administrative and planning activities to products as accurately as the manual activities. Even reducing production depth can change direct costs to overhead costs because of the greater number of external procurements.

Overhead costs from planning, management, quality control, and coordination in such areas as research and development, procurement, and work preparation are increasingly important compared with actual product manufacture. Managers can gain a high degree of cost transparency for activity output using theoretical cost accounting methods, and possibilities for reducing cost are used extensively. However, the connection between overhead cost areas is often unclear and the optimization options unrealized.