Non-Production Overhead Costs

Overview

Non-production overhead costs are the indirect costs incurred by an organization that do not relate to the manufacturing process. These costs encompass various areas of the business, including administrative, selling, and distribution overheads, and in some cases, research and development (R&D) costs. Understanding and managing these costs are crucial for accurate profit calculation and efficient operation of a business.

Examples

Administration Overheads: These include costs related to the overall administration of the business such as office salaries, utilities, supplies, and office rent.
Selling Overheads: These are costs incurred in marketing and selling products. Examples include promotion costs, salesperson salaries, and advertising expenses.
Distribution Overheads: These cover the costs related to the storage and delivery of products, such as warehouse rent, transportation, and handling expenses.
Research and Development Costs: Although not always classified under non-production overheads, these can include expenses related to the development of new products or improvement of existing products, such as laboratory costs, research staff salaries, and testing expenses.

Frequently Asked Questions

What are non-production overhead costs?

Non-production overhead costs are indirect costs that do not directly relate to the manufacturing process. They include administration overheads, selling overheads, distribution overheads, and sometimes research and development costs.

How do non-production overhead costs differ from manufacturing overheads?

While manufacturing overheads include all indirect costs directly related to production, such as factory rent, utilities, and maintenance, non-production overhead costs encompass indirect expenses not associated with the manufacturing process.

Why are non-production overhead costs important?

These costs are important as they contribute to the overall expenses a company must manage to operate effectively. Proper accounting and control of non-production overheads ensure accurate profit measurement and financial health of the company.

Can research and development costs be included in non-production overheads?

Yes, in some cases, research and development costs are included in non-production overheads as they are indirect costs not directly related to the production process.

How can a company control non-production overhead costs?

Companies can control these costs by conducting regular audits, setting budgets, negotiating better terms with suppliers, and improving operational efficiencies.

Indirect Costs: Costs that are not directly assignable to a specific product or service.
Manufacturing Overheads: All indirect costs related to the production process.
Administration Overheads: Expenses related to the administration and support functions of a business.
Selling Overheads: Costs incurred to market and sell products or services.
Distribution Overheads: Expenses related to the distribution and delivery of products.
Research and Development Costs: Expenditures associated with the development of new products or services.

Online References

Suggested Books for Further Studies

Cost Accounting: A Managerial Emphasis by Charles T. Horngren, Srikant M. Datar, and Madhav Rajan
Financial and Managerial Accounting by John J. Wild, Ken W. Shaw, and Barbara Chiappetta
Management and Cost Accounting by Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, and George Foster
Principles of Cost Accounting by Edward J. Vanderbeck and Maria R. Mitchell
Accounting for Decision Making and Control by Jerold Zimmerman

Accounting Basics: Non-Production Overhead Costs Fundamentals Quiz

### What are non-production overhead costs? - [x] Indirect costs not classified as manufacturing overhead - [ ] Direct costs related to production - [ ] Costs associated only with raw materials - [ ] Factory maintenance expenses > **Explanation:** Non-production overhead costs are indirect costs that are not classified as manufacturing overheads, including administration, selling, and distribution overheads. ### Which of the following is an example of administration overhead? - [x] Office salaries - [ ] Raw materials - [ ] Production equipment - [ ] Factory utilities > **Explanation:** Administration overheads include costs like office salaries, which are not directly related to the production process. ### Are selling expenses considered as part of non-production overhead costs? - [x] Yes, selling expenses are included - [ ] No, they are not included - [ ] Only partially included - [ ] They are part of manufacturing overheads > **Explanation:** Selling expenses, such as advertising and promotion costs, are included in non-production overheads. ### Distribution overheads cover which of the following expenses? - [ ] Raw material costs - [ ] Office rent - [ ] Salaries of production staff - [x] Transportation and handling expenses > **Explanation:** Distribution overheads include costs related to the delivery of products, like transportation and handling expenses. ### What are R&D costs considered in terms of overheads? - [ ] Part of direct costs - [x] Sometimes part of non-production overhead costs - [ ] Always manufacturing overheads - [ ] Not related to overheads > **Explanation:** Although not always classified under non-production overheads, R&D costs can be included as they are indirect expenses not directly related to production. ### Why is controlling non-production overhead costs essential? - [ ] To increase raw material usage - [ ] To ensure higher production speed - [ ] To reduce product quality - [x] To improve overall financial health > **Explanation:** Proper control of non-production overhead costs improves the overall financial health by managing indirect expenses efficiently. ### Which of the following is not a type of non-production overhead? - [ ] Administration overheads - [ ] Selling overheads - [ ] Distribution overheads - [x] Direct labor costs > **Explanation:** Direct labor costs are not part of non-production overheads, as they relate directly to the production process. ### Example of selling overheads includes: - [ ] Warehouse rent - [x] Advertisement expenses - [ ] Factory maintenance - [ ] Production supervisor salaries > **Explanation:** Selling overheads include expenses like advertisements used for marketing and selling products. ### Administration overheads often encompass which type of costs? - [ ] Direct material costs - [ ] Production machinery costs - [x] Office utilities and supplies - [ ] Factory worker wages > **Explanation:** Administration overheads typically cover costs like office utilities and supplies, which are part of the general administrative expenses. ### How might a company reduce non-production overhead costs? - [ ] Increase production speed - [ ] Hire more production workers - [x] Conduct regular audits and set budgets - [ ] Spend more on factory utilities > **Explanation:** Companies can reduce non-production overhead costs through regular audits, budgeting, and improving operational efficiencies to control unnecessary expenses.

Thank you for immersing yourself in our meticulous explanation of non-production overhead costs and navigating through our strategic accounting quiz! We hope this enhances your understanding and appreciation for the intricate aspects of cost management.