Behavioral Overhead

Posted in Finance, Accounting and Economics Terms, Total Reads: 614

Definition: Behavioral Overhead

In accounting overheads are the cost which are necessary to keep a business running. These costs are also called as operating expenses and are not accounted in the direct cost of product or service being offered. Behavioral overhead is the functional classification of under which the overhead is classified based on the level of activity achieved.

The various types of behavioral Overheads are:

• Fixed Costs: these costs do not vary with the level of activity (volume of goods produced) and remain constant for a given period of time. It is also referred to as capacity or committed cost and have to be incurred even if the volume of production is below the planned level. The total fixed cost remains constant for a period of time however the fixed cost per unit of goods produced or sold decreases with the increase in the number of units produced/sold.

Example: salary of the employee, rent of facility, depreciation of equipment’s etc.

• Variable Overheads: these costs vary proportionally with the production/sales volume. Hence a total increase in sales/production volume leads to an increase in the overall variable cost. However the variable cost per unit remains constant.

Example: Direct material cost, indirect wage etc.

• Semi Variable Cost: these costs behave showing proportion of fixed cost and certain proportion of variable cost. These costs remain fixed within a certain level of activity and vary then after. They are not directly proportional to the volume. They are also known as semi fixed costs.

Example: cost of telephone, electricity, heating, lighting repair and maintenance.


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