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Definition: Functional Overheads
Overheads may be defined as the ongoing expenses in operating a business. Sometimes referred to as the operating expenses, they typically include things like electricity, rent, wages etc. They are all the expenses in the income statement except the direct labor, direct materials and direct expenses. There are different ways of classifying the overheads. The broad classifications include functional classification or behavioral classification or element wise classification etc.
The functional overheads will typically include things like
• Factory Overheads: These include the indirect overheads incurred within the factory. These overheads are also called manufacturing overheads, production overheads or works overheads etc.
• Administration or Office Overheads: These include indirect overheads within the administrative areas. Typically these include the management fees or wages, rent, printing, telephone, electricity, stationery, legal expenses, auditor fees, repairs of office building etc.
• Selling Overheads: The indirect expenses incurred in the selling activities will be included in the selling overheads
• Distribution Overheads: These expenses are related to the distribution activities. Sometimes the selling overheads and the distribution overheads are together referred to as the selling and distribution overheads. Selling and distribution expenses include the promotional expenses, advertisements, showroom expenses, wages to sales personnel, free gifts, after sales services, commission to selling agents, warehouse expenses etc.
The functional overheads can also be classified into the manufacturing overheads and non-manufacturing overheads. The manufacturing overheads include the indirect expenses incurred in converting the raw materials into finished goods and include the factory overheads. The non-manufacturing overheads include the administrative overheads and the selling and distribution overheads.