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Undertake a literature search on overhead costs and write about the subject drawing relevant conclusions - Essay Example
Finance & Accounting
Pages 6 (1506 words)
The subject of overhead costs is one of the most topical areas in conventional accounting. In several instances, the overhead costs of a business largely determine the survival of that business on the basis of expenses versus revenues…
Undertake a literature search on overhead costs and write about the subject drawing relevant conclusions
On the other hand, labour and material costs are easily traceable and can therefore easily be associated with the final product (Hartley, 2009). The allocation and measurement of overhead costs is therefore a very important factor in accounting given that it makes no sense to engage in production if the business experiences much overhead cost that cannot balance the revenues (Hilton, 2012). The overhead costs in business are basically the costs the ongoing expenses realized in the operations. They include electricity, rent wages and gas. The name overhead arises out of the fact that these costs cannot be easily associated with the final products but are nevertheless imperative for the continued functioning of the business (Kieso & Weygandt, 2001). In any case, most of the overhead costs are not directly related to the business. For instance full rent for the premises has to be paid whether the business operates for fewer hours or not. In the income statement, the overhead costs include all the costs except direct materials, direct labour and direct expenses (Horngren, 2002). Overhead allocation In most cases, the overhead costs are normally much higher than the direct costs. In this regard, accountants must effectively allocate overhead costs to the inventory. Overhead costs normally fall into two categories. ...