Operating overhead

Definition

Operating overhead consists of indirect costs that are not directly tied to a specific job or product but are necessary for running business operations. These can include utilities, rent, and administrative salaries.

5 Must Know Facts For Your Next Test

1. Operating overhead is crucial in determining the total cost of a job in both manufacturing and nonmanufacturing environments.
2. It includes expenses such as utilities, office supplies, rent, and administrative salaries.
3. Operating overhead is allocated to jobs based on a predetermined overhead rate in job order costing systems.
4. Accurate allocation of operating overhead ensures proper pricing and profitability analysis.
5. Misallocation of operating overhead can lead to incorrect cost assessments and financial decisions.

Review Questions

• What types of expenses are classified under operating overhead?
• How is operating overhead allocated in a job order costing system?
• Why is accurate allocation of operating overhead important for businesses?

Related terms

Direct Costs: Costs that can be directly traced to a specific job or product, such as raw materials and direct labor.

Predetermined Overhead Rate: A rate used to allocate indirect costs to jobs, calculated before the period begins based on estimated costs and activity levels.

Job Order Costing System: A method used to assign costs to specific jobs or orders, tracking direct materials, direct labor, and allocated overhead.