Overheads in Accounting

What Are Overheads?

Overheads are the costs of running a business that cannot be traced to a single product, job or order, such as rent, electricity, a supervisor’s salary, insurance and accountancy fees. They are also called indirect costs. In India, companies that must keep cost records follow ICMAI’s Cost Accounting Standards when they classify and charge them.

Where overheads enter the cost of one lock Prime cost Rs.110 Production cost Rs.130 Cost of sales Rs.138 Selling price Rs.165 Material + labour + production overheads + admin and selling + profit Indirect costs are the layers added on top of material and labour. Per-lock figures are from the Aligarh example below.

Types of Overheads

Overheads are grouped two ways: by the part of the business that incurs them, and by how they move with output.

By behaviour, each one falls into one of three kinds:

• Fixed: the same each month whatever you make, like rent
• Variable: rises and falls with output, like power for presses that run only when orders come in
• Semi-variable: a fixed part plus a usage part, like a commercial power bill with a fixed demand charge on top of units consumed

To load these costs onto a product, a business divides them by a base: units made, machine hours, labour hours or, in a restaurant, covers served. The result is the overhead absorption rate, and it feeds straight into unit cost.

Overhead absorption rate = Total overheads ÷ Base (units, machine hours or covers)

For companies covered by the Companies (Cost Records and Audit) Rules, 2014, the Cost Accounting Standards set how this is done: CAS-3 for production, CAS-11 for admin and CAS-15 for selling and distribution.

Overheads vs Direct Costs

The test is whether you can point at the product and say this cost went into it.

Overheads are not the same as fixed costs, either. A power bill is an indirect cost, yet it climbs in a busy month.

Restaurants draw the line in their own way. Ingredients, and usually kitchen wages, count as direct costs, while rent, utility expenses and the manager’s pay are indirect costs.

Overheads Example

A padlock maker in Aligarh made 8,175 brass padlocks in October 2025. Material and direct labour came to Rs.110 a lock, and its indirect costs for the month looked like this.

Note: this is an invented example for illustration only.

The five production lines total Rs.1,63,500, or Rs.20 a lock. Admin and selling costs add Rs.65,400, or Rs.8 a lock. So each lock costs Rs.130 to make and Rs.138 to make and sell, against a wholesale price of Rs.165 before GST.

Now the part owners often miss. When 600 locks are still unsold at month end, AS 2 (Ind AS 2 for larger companies) lets production overheads into their value but generally keeps admin and selling costs out, so they go into closing stock at Rs.130 each, not Rs.138. Valuing them at Rs.138 would overstate stock, and profit with it, by Rs.4,800.

And if output had halved in a slow month, AS 2 would not let the fixed part be spread over fewer locks; the part left over is charged as an expense that month.

How Overheads Squeeze Your Margin

Overheads rarely jump. They creep: a lease renewal adds a few thousand a month, a second supervisor joins, the generator needs a service contract, and none of it shows on a single bill.

The danger is pricing on prime cost alone. In the Aligarh example, Rs.110 against Rs.165 looks like a fat margin, but after indirect costs the maker keeps Rs.27 a lock. A restaurant break-even calculator puts the same question to an outlet: how many covers before rent and power are paid for?

Across the outlets we work with, an owner who knows food cost to the rupee often cannot say what rent and power cost per bill. This rundown of restaurant expenses and how to manage them is a good place to start listing them, and a retail store profitability analysis template does the same job for a shop.

See Every Overhead Line in Your P&L

Indirect costs are easy to underestimate when they sit scattered across bills and bank entries. For retail businesses, Petpooja Invoice offers expense categorisation and detailed P&L statements, so rent, power and salaries can sit as separate lines against your sales.

For restaurants, Petpooja POSS gives error-free reports on day-end sales, among 80+ essential business reports, and those sales figures are what you divide rent and power by.

Divide last month’s rent and power by the number of bills you raised, and see what each bill really carries.

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