Definition

Indirect Overhead can be defined as costs that are incurred during the production process, regardless of the output that the company produces.

Alternatively, these are the costs that the company has to bear, but cannot be associated with a particular product. Unlike direct overhead costs, indirect overhead costs are not directly related to the production process.

As a matter of fact, they cannot be individually attributed to a single product, but since they are incurred as part of the overall production process, they can be termed as fixed costs or costs that are relating to the overall business, regardless of the production output of the company.

Indirect Overheads can be regarded as a non-manufacturing overhead, which cannot be specifically identified to a certain job. These are the costs that are fixed regardless of the output that the company is producing at a given period of time.

Example

Indirect Overheads are non-factory expenses that cannot be associated with specific product costs. Examples include the rent of the factory premises or the salaries that are extended to security guards at the place.

Rent, Supervisor Salary, and other admin-related expenses are costs that are incurred to smoothen the manufacturing process or the overall business model.

However, these costs do not add substantial value to the product that the company is producing. Therefore, they are termed indirect overhead costs.

Accounting Treatment

As per Accounting Laws, it can be seen that indirect manufacturing direct 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 direct overheads. The cost allocation is mostly done using cost drivers.

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In the same manner, indirect 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 indirect 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

Indirect Overhead, therefore, can be best defined as a non-manufacturing overhead, which is incurred during the production process, regardless of the fact that this does not vary with the level of output.

Regardless of the fact that it is not associated directly with the manufacturing process, yet it is an inherent factory cost that needs to be duly accounted for.

However, with indirect costs, it can be seen that they are normal overhead costs that a business occurs, specific to the manufacturing context.

For example, electricity is utilized in the factory, for both, production processes, and admin-related processes. In the manufacturing account, only the costs associated with the manufacturing and production process are going to be included.