Definition of overheads
Overhead costs are costs that cannot be directly allocated to a specific product, service or cost center. They comprise various types of costs incurred in a company and are often referred to as overhead costs. In contrast to direct costs, which can be allocated directly to a cost unit such as a production unit or an order, overhead costs must be allocated to the various products and services using an allocation key.
Types of overheads
Administrative overheads
Administrative overheads comprise various expenses that arise from general administrative tasks in a company. These types of costs include personnel costs for administrative staff, rent for office buildings, costs for office materials and IT infrastructure as well as expenses for accounting and controlling. These costs represent a significant burden on the operating result and must be carefully monitored in order to keep an eye on the company's overall costs.
Production overheads
Production overheads are costs that are incurred in the production process but cannot be directly allocated to a specific product. Examples include energy costs for the production hall, depreciation on machinery, maintenance costs and wages and salaries for production personnel who do not work directly on a specific product. These costs must be recorded precisely in order to enable accurate cost accounting and price calculation.
Material overheads
Material overheads refer to costs for general consumables that are used in several products. These include, for example, lubricants, tools and other operating resources that cannot be directly allocated to a product. These costs are an integral part of production and must be carefully monitored to ensure the efficiency and profitability of the production units.
Sales overheads
Sales overheads comprise costs incurred in connection with the sale of products and services. These include salaries and social security contributions for sales staff, marketing and advertising costs, transportation and storage costs as well as expenses for sales commissions and customer services. These costs are crucial to the success of the products on the market and must be included in the price calculation in order to ensure profitability.
Overhead costs in cost center accounting
Importance of cost center accounting: Cost center accounting is an essential component of cost accounting in a company. It is used to allocate overhead costs to the various cost centers and thus enable the precise allocation of costs. By accurately recording overhead costs in the various cost centers, companies can better monitor and control the profitability and efficiency of their business processes. This method of cost accounting is of great importance in business administration.
Primary and secondary overheads: In cost center accounting, a distinction is made between primary and secondary overheads. Primary overheads are cost types that arise from the consumption of goods and services that the company purchases externally. Examples include material costs, energy costs and personnel costs. Secondary overheads, on the other hand, arise from the use of internal services, such as the use of internal services or the production of semi-finished goods. This distinction is important for the precise allocation of overheads.
Fixed and variable overheads: Another important distinction in overheads is the subdivision of fixed and variable overheads. Fixed overheads remain constant regardless of the production volume, such as rent for company buildings or depreciation on machinery. Variable overheads, on the other hand, change with the production volume. These include material costs and energy costs, for example, which vary directly with the quantity of units produced. This differentiation helps with cost planning and price calculation.
Cost center overhead costs: Cost center overhead costs are those overhead costs that cannot be allocated directly to a cost object, but are first distributed to the cost centers. This allocation is usually based on an allocation key that distributes the costs in proportion to the activities caused. The exact allocation of cost center overheads is crucial for cost unit accounting and the precise calculation of product costs. Examples of such keys are the number of working hours or machine running times.
Cost allocation sheet: The operating accounting sheet is an important tool for allocating overhead costs to the individual cost centers. In this sheet, all cost types incurred are systematically recorded and distributed to the relevant cost centers. This enables detailed monitoring and control of overhead costs throughout the company. The cost allocation sheet is therefore essential for precise cost control and efficient controlling.
Calculation of overheads
Calculation methods
Overheads are calculated using various methods, which can vary depending on the company structure and requirements. One common method is overhead costing, in which the overhead costs are added to the direct costs to determine the total cost of a product. This enables an accurate price calculation and helps to assess the profitability of the production units. This method is particularly widespread in business administration.
Calculate overhead share on products and sales
In order to calculate the proportion of overheads to products and sales, the total overheads must be determined and then allocated to the individual products. This can be done, for example, on the basis of the number of units produced or the number of hours worked. In this way, the proportion of overheads per production unit can be determined, which in turn is important for cost unit accounting and the evaluation of product costs.
Calculate overhead surcharge
The overhead surcharge is a percentage that is added to the direct costs of a product in order to distribute the overhead costs to the cost units. The overhead surcharge is calculated by dividing the overhead costs by the direct costs and then multiplying by 100. This percentage indicates how high the share of overhead costs is in the total costs and helps to calculate product prices accurately. This method ensures that the indirect costs are allocated appropriately to the products.
Examples and practical application
A practical example for calculating overheads is the manufacture of a product in a production company. Assume a company produces 1,000 units of a product and has total costs of 100,000 euros, with 60,000 euros being direct costs and 40,000 euros being overhead costs. The overhead surcharge is therefore 66.67% (40,000 euros / 60,000 euros * 100). This overhead is then added to the direct costs of each production unit to calculate the total cost per unit. This example illustrates the practice of overhead calculation and its importance for price calculation.
Cost unit accounting and overheads
Cost object accounting plays a central role in the distribution of overhead costs. It is used to precisely determine the total costs attributable to a specific cost object (e.g. a product or an order). This includes the recording of all direct and indirect costs and their allocation to the corresponding reference objects. Cost object accounting is therefore an indispensable tool for cost control and the optimization of company processes.
Identification of overheads
Cost identification process: The identification of overheads is an essential step in a company's cost accounting. In order to accurately record overhead costs, all relevant expenses must be systematically documented and categorized. This includes expenditure on materials, services, rents, energy costs and personnel costs. This recording is done by analyzing invoices, receipts and internal records.
Allocation to cost centers and cost units: After identification, the overhead costs must be allocated to the corresponding cost centers and cost objects. This is often done by applying an allocation key that distributes the costs to the various reference objects in proportion to the activity caused. Examples of such keys are the number of working hours or machine running times. This precise allocation is crucial for cost object accounting and the calculation of product costs.
Use of cost accounting methods: Various cost accounting methods support the efficient identification and allocation of overheads. Activity-based costing focuses on the analysis and evaluation of business processes in order to understand and optimize overhead costs in detail. Overhead cost value analysis evaluates overhead costs according to their benefit to the company, which provides starting points for cost reductions. Both methods help to make the cost structure more transparent and identify optimization potential.
Practical examples: One example of the identification and allocation of overheads is the maintenance costs of a production machine. These costs are recorded as overheads and allocated to the corresponding products using an allocation key, such as machine running times. Another example is the allocation of energy costs for a production hall in proportion to the number of units produced.
Optimization of overhead costs
Increased efficiency through process optimization
The optimization of overhead costs begins with the analysis and improvement of business processes. Inefficient processes can be identified and improved by implementing best practices and process innovations. By improving process flows, costs can be reduced and efficiency increased, leading to a reduction in the overall cost structure.
Reduction of overhead costs
Overhead costs are a significant part of overheads. These can be reduced through the digitalization of administrative processes and the use of efficient IT systems. Outsourcing certain tasks to external service providers can also help to reduce these costs without compromising service quality.
Reduce material and energy costs
Material and energy costs are significant components of overheads. By introducing energy management systems and using energy-efficient technologies, companies can reduce their energy costs. Efficient material procurement and warehousing as well as minimizing waste and wastage also help to reduce costs.
Optimization of personnel costs
Personnel costs can be reduced through improved employee productivity and optimized personnel planning. Measures such as employee training, flexible working time models and the automation of routine tasks increase efficiency and help to keep personnel costs under control.
Use of modern technologies
The use of modern technologies, such as automation and artificial intelligence, can significantly improve the efficiency of business processes and thus reduce overheads. By automating repetitive tasks and using data-based decision-making processes, companies can make better use of their resources and reduce costs.
Regular review and adjustment
The continuous review and adjustment of the cost structure is crucial for the sustainable optimization of overheads. Companies should regularly analyze their overheads in order to identify optimization potential. By introducing a continuous monitoring system and implementing control mechanisms, companies can ensure that overheads are kept at an optimal level in the long term.
Practical example: Successful cost reduction
One successful example of optimizing overheads is the implementation of an energy management system in a production plant. By using energy-efficient technologies and training employees in the conscious use of energy, the company was able to reduce its energy costs by 20%. At the same time, material procurement was optimized, which led to a 15% reduction in material costs. These measures resulted in a significant reduction in overheads and an improved profit margin.
Conclusion
Overheads are an indispensable part of cost accounting and have a significant influence on a company's price calculation and profitability. They include various types of costs that cannot be directly allocated to a product, service or cost center. The precise recording and allocation of these costs is crucial for realistic and competitive pricing.
A clear distinction between direct costs and overheads is essential. While direct costs can be allocated directly to a cost unit, overhead costs, such as administrative costs, energy costs and maintenance costs, must be distributed to the products and services using various distribution keys.
Special attention should also be paid to non-genuine overheads. These can theoretically be recorded as direct costs, but are often treated as overhead costs due to their low value or large number. Examples of this are small parts such as screws or operating resources, which would be too costly to allocate individually. This contrasts with genuine overheads, which cannot be clearly allocated to a specific product and are therefore always treated as overheads.
By using modern cost accounting methods, such as activity-based costing and overhead analysis, companies can manage and optimize their overheads more efficiently. The continuous review and adjustment of the cost structure helps to minimize overheads in the long term and increase the company's profitability.
Overall, overheads are a complex but crucial element of corporate management. Accurately recording, allocating and controlling them makes it possible to increase cost transparency, make informed decisions and ensure long-term profitability. By applying proven methods and continuous optimization, companies can manage their overheads efficiently and strengthen their competitiveness in the market.
