Fixed Cost and Overhead


bklynboy

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Fixed cost is a cost that does not vary with production. It could be part of a direct (like rent) or overhead (like CEO salary) component. OH just means its a general cost of the company that is allocated to the production lines (like CEO salary)
 
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In addition to what bklynboy stated, some manufacturing companies will breakdown and classify none direct production costs, as overhead, into fixed and variable costs. All other costs, will labeled expenses, and will be delegated to a classification called - General Selling and Administration, Non-Production Expenses, Other Operating Expenses, and so forth.
A quick search on the web, with the key words INCOME STATEMENTS, will show you how the classification and reporting is handled by various enterprises, in various industries.
But, to be more specific to your question, first let's clarify some titles:
The term "cost" is a flexible word that is used freely to identify a loss of value, anticipated or incurred. "Expense" is sometimes used
in the same way. However in the manufacturing sector, more often than not, a "cost" is usually associated with the process of manufacturing, experienced at the time, or spread over benefiting periods. "Expense" can be a label with the same intent, but many
enterprises choose to delegate that word to the selling and administrative activities.
"Overhead" in a manufacturing enterprise has identities, within that classification, with both "fixed" and "variable" components itemized under that heading. Identities that are not direct materials, and direct labor, are usually associated with overhead. As bklynboy stated, those "costs" that stay relatively static, regardless of the tempo of production, are considered fixed. Think of it this way, rent is usually constant, from billing period to period. So if the plant were to shut down for, say a month, the rent would still be incurred. Even then, it depends on the norms of the industry that the enterprise is in, and the historical reporting needs and wants of the management in that enterprise.
Some fixed costs can be impacted if the production cycle were to change. Take occupancy for example. If an enterprise rents space, for say storing finished goods, and the demand for those goods increases where additional storage space is necessary, this impacts the rental fixed cost by adding additional occupancy. So the tempo of production dictates the classification of all costs and expenses.
Some reporting includes a detailed breakdown of every penny that has even the slightest influence on production, thus broken down into fixed and variable identities under the classification of overhead. Other enterprises are less inclined to do so. Again, it all depends on the demands of management and historical consistency.
 
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When previewing my response, I edited a few lines and in doing so, removed a continuation of the following:
The term "cost" is a flexible word that is used freely to identify a loss of value, anticipated or incurred.
I edited out, somehow, the continuation of that sentence which should have read in total:
The term "cost" is a flexible word that is used freely to identify a loss of value, anticipated or incurred, in addition
to added value - for example going from a cost in a general term, to an inventory asset.
 
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In addition to what bklynboy stated, some manufacturing companies will breakdown and classify none direct production costs, as overhead, into fixed and variable costs. All other costs, will labeled expenses, and will be delegated to a classification called - General Selling and Administration, Non-Production Expenses, Other Operating Expenses, and so forth.
A quick search on the web, with the key words INCOME STATEMENTS, will show you how the classification and reporting is handled by various enterprises, in various industries.
But, to be more specific to your question, first let's clarify some titles:
The term "cost" is a flexible word that is used freely to identify a loss of value, anticipated or incurred. "Expense" is sometimes used
in the same way. However in the manufacturing sector, more often than not, a "cost" is usually associated with the process of manufacturing, experienced at the time, or spread over benefiting periods. "Expense" can be a label with the same intent, but many
enterprises choose to delegate that word to the selling and administrative activities.
"Overhead" in a manufacturing enterprise has identities, within that classification, with both "fixed" and "variable" components itemized under that heading. Identities that are not direct materials, and direct labor, are usually associated with overhead. As bklynboy stated, those "costs" that stay relatively static, regardless of the tempo of production, are considered fixed. Think of it this way, rent is usually constant, from billing period to period. So if the plant were to shut down for, say a month, the rent would still be incurred. Even then, it depends on the norms of the industry that the enterprise is in, and the historical reporting needs and wants of the management in that enterprise.
Some fixed costs can be impacted if the production cycle were to change. Take occupancy for example. If an enterprise rents space, for say storing finished goods, and the demand for those goods increases where additional storage space is necessary, this impacts the rental fixed cost by adding additional occupancy. So the tempo of production dictates the classification of all costs and expenses.
Some reporting includes a detailed breakdown of every penny that has even the slightest influence on production, thus broken down into fixed and variable identities under the classification of overhead. Other enterprises are less inclined to do so. Again, it all depends on the demands of management and historical consistency.
Thanks for the reply.. This is really useful :)
 

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