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Define overhead costs and their traceability

Define overhead costs and their traceability

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Answer #1

Overhead costs are those costs that cannot be directly traced to a product/service/activity, but are still essential for production and running of the business.

Examples are:

Factory rent, factory insurance premium, salaries of managers involved in production etc.

As they are not traceable directly to products/services, they are assigned to products/services on some indirect basis. They may be traced to departments/activities in the first stage and then assigned to products/services in the second stage.

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