A manufacturing concern carries out mainly two types of functions. These are manufacturing and non-manufacturing functions. Manufacturing functions are concerned with converting raw materials into finished goods while non-manufacturing functions are concerned with general administration, selling and distribution of goods. The organization incurs several indirect expenses while performing such manufacturing and non-manufacturing activities. The classification of overheads with reference to these major functions of the organization is functional classification. Thus , the following are the two major types of overheads on the basis of functions:
1. Manufacturing Overheads:
1. Manufacturing Overheads:
Manufacturing overheads are also known as production overheads or works or factory overheads. Manufacturing overheads are indirect expenses which are incurred in carrying out manufacturing activities of the concern. Manufacturing overheads include all the indirect expenses incurred in converting raw materials into finished goods. Power, factory rent, factory insurance, indirect materials, indirect wages, depreciation and repair and maintenance of factory building, plant and machinery are some examples of manufacturing overheads.
2. Non-manufacturing Overheads:
The non-manufacturing overheads include the following two overheads:
* Administrative overheads
Administrative overheads are indirect expenses which are incurred in connection with general administration of the whole concern. Administrative overheads incur while carrying out office and administrative activities. Examples of office and administrative overheads are office salaries, rent, printing and stationary, telephone and electricity, depreciation and repair and maintenance of office building, furniture and equipment, legal charges and directors' remuneration.
* Selling And Distribution Overheads
All the indirect expenses incurred for selling and distribution of finished goods are known as selling and distribution overheads. Selling overheads are incurred for creating demand, attracting present and potential customers and retaining old customers. Remuneration to sales personnel, advertisement, showroom expenses, samples and free gifts and after sales service expenses are some of the examples of selling overheads.
* Administrative overheads
Administrative overheads are indirect expenses which are incurred in connection with general administration of the whole concern. Administrative overheads incur while carrying out office and administrative activities. Examples of office and administrative overheads are office salaries, rent, printing and stationary, telephone and electricity, depreciation and repair and maintenance of office building, furniture and equipment, legal charges and directors' remuneration.
* Selling And Distribution Overheads
All the indirect expenses incurred for selling and distribution of finished goods are known as selling and distribution overheads. Selling overheads are incurred for creating demand, attracting present and potential customers and retaining old customers. Remuneration to sales personnel, advertisement, showroom expenses, samples and free gifts and after sales service expenses are some of the examples of selling overheads.