Definition: Overheads are expenses other than direct expenses. They include indirect materials, indirect labour and other indirect expenses. The prime costs – direct wages cost and the cost of materials consumed can be easily ascertained and charged to a job or process. However, many costs are incurred so that the business can operate eg. rent, rates, depreciation, heat and light etc. The technique for charging overheads to products, jobs or processes is called absorption costing. Absorption costing is concerned with the type and nature of costs rather than cost behaviour.
There are two main purposes of absorption costing:
(1) to ascertain the cost of a product, job or process.
(2) to assist business with their pricing – a cost plus approach.
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