Undertake a literature search on overhead costs and write about the Essay

Undertake a literature search on overhead costs and write about the subject drawing relevant conclusions - Essay Example 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 inclu de 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. Administrative overheads include all the costs realized in production and development of goods such as front office and sales. Manufacturing overheads include all the costs incurred by the business other than direct costs (Innes & Mitchell, 2005). It is imperative to allocate the manufacturing overheads to the inventory items classified as finished goods or work in progress. However, the overheads should not be allocated to the raw materials. In one procedure, all the manufacturing costs are accumulated into cost pools and then an activity formula is applied in apportioning the overheads in the cost pools to the inventory in the business. As such, the allo cation formula becomes: Cost pool/Total activity measure= Overhead allocation per Unit Absorption costing In some cases, the overhead costs are ignored from the general expenses realized by a business. In this case, absorption costing is an important way of ensuring that such omissions are well addressed. Unlike variable costing where the fixed costs are not actually absorbed by the product, absorption costing ensures that all the direct costs realized in the production of goods are factored within the cost base. In this case, absorption costing is important given that the fixed cost normally provide future benefits to the business. Through the use of absorption costing, the overhead costs are easily included in the total production costs and can therefore be attributed to any unit production. Tax advantages Manufacturing overhead costs are normally tax deductible. It is therefore very important for the business to effectively track all these cost to the overall manufacturing expens es. In this case, the taxable income can greatly be reduced and subsequently lower the tax burden for the business (Khalik, 2008). Most of the overhead costs are normally deductible in the very year they are incurred which actually works to the advantage of the business. Nevertheless, equipment is depreciated over a period of years. Disadvantages Rising prices Considering the inflationary environment realized in the present business environment, the rising overhead costs