Glossary · Also called Indirect costs
Overheads
Indirect costs of running the factory or business that cannot be traced to one product.
What it means
Indirect costs, such as factory rent, power and supervision, that support production but are not directly traceable to a single unit.
Example
Factory rent is an overhead shared across everything produced.
Why it matters
Factory overheads are added after prime cost to reach the cost of production.
In practice
Factory overheads are added after prime cost in the manufacturing account to give the total cost of production. Office and selling overheads appear later, as expenses in the income statement. This split matters because only factory overheads become part of inventory value.
Consider a small plant paying RM1,800 factory rent, RM600 machine depreciation and RM400 supervisor wages. These RM2,800 of overheads are absorbed into the goods made, not written off immediately.
Students often confuse overheads with direct costs. An overhead cannot be traced to one unit and so is spread across output. A direct cost belongs to a single product. Administrative overheads, such as office stationery or accountant's fees, never enter the manufacturing account. They are charged against profit in the period they arise.
If you are unsure which overheads go where, one of our teachers can sort a typical cost list with you and explain each choice. Book a trial class.
Related terms
Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 5.4 Manufacturing accounts (page 17).
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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