Definition
Direct overhead can be defined as costs that are incurred during the production process, regardless of the output that the company produces. In other words, this is the cost that the company has to pay, regardless of the level of output they operate.
Unlike costs like direct material, which are variable and directly proportionate to the quantity that the company produces, it can be seen that this is the cost that cannot be termed as directly proportionate to the output produced. Therefore, it says fixed at a certain level of output.
Direct overheads can be regarded as a manufacturing overhead, which is directly incurred during the production process, but cannot be specifically identified to a certain job.
This means that without this particular cost, the manufacturing or the production process could not have taken place, but, it cannot be identified as a certain product.
In this article, we are going to talk about the accounting for direct overhead, specifically on how it is recognized in the financial statements, the double entries, and other related.
Example
As seen earlier, it can be seen that indirect factory-related expenses, that are incurred during the production process.
Examples include electricity that is used in the production process or the depreciation that is charged on the machinery and other relevant equipment.
Direct overhead costs are a subcategory of manufacturing overhead, and it can be seen that this particular cost is directly associated with the manufacturing process.
Without incurring this cost, the manufacturing process would not have taken place. For example, the manufacturing process cannot take place without electric costs. However, the process can still take place without the admin supervisor.
Accounting Treatment
As mentioned above, it can be seen that direct manufacturing overheads are applied to the product to arrive at a certain product cost. This product cost can then be calculated by adding other cost components, which include direct material, direct labor, and indirect overheads. The cost allocation is mostly done using cost drivers.
Direct overhead must also be included in the work-in-process inventory, and finished goods inventory in the manufacturing account, as well as Cost of Sales in its Income Statement.
The overall process to record and calculate direct overheads is done by applying a rate of application to the costs, and then calculating the difference to see for under application for over-application.
Under applied or over applied fixed costs then need to be adjusted to record and show the actual amount of overhead that is incurred over the course of time.
Conclusion
Direct Overhead, therefore, can be best defined as a manufacturing overhead, which is incurred during the production process, regardless of the fact that this does not vary with the level of output, yet it can be seen that this particular cost is an extremely important component in the overall production process.
Direct overheads and direct costs can be explained using the concept of direct material and indirect material.
The only difference between indirect material, and direct material, is the fact that direct material can be regarded as an upfront product cost, which can be traceable to an individual product, whereas indirect material cannot be traced to an individual product.
