# What are some examples of indirect spending

In the following, we will explain to you, using examples, what overhead costs and direct costs are and how you can differentiate between the two terms.

Check out our video Direct costs overheads if you want to understand the topic even faster.

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• Difference between direct costs and overhead costs
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The overhead costs are compared to the unit costs in the Cost center accounting taken into account and the Cost centers, for example departments, indirectly attributed via key. They accrue for several products and for this reason cannot be directly assigned to any product or service. That's why they are also called overheads indirect costs, overheads or indirect costs.

Lots Fixed costs are also overheads, but not all. Rental costs are, for example, fixed and overhead costs, as these are incurred regardless of the quantity produced. Electricity costs or costs for water consumption, on the other hand, are only overheads and not fixed costs, as they vary depending on the production volume.

In contrast to the individual costs, the overhead costs must be added to the cost centers via an intermediate step. The Overhead breakdown, so the indirect allocation of overheads to the cost units is carried out with the help of Calculation ratesthat too Billing rates or Surcharge rates to be named. The overhead costs are first distributed to the cost centers during cost center accounting and then with the help of an overhead surcharge in Calculation scheme charged to the cost bearers.

You're a seller of giant pretzels at Oktoberfest. On average, you sell around 500 giant pretzels and 500 cheese sticks and have to pay € 500 stand fee and € 100 stand rental fee per day. All other costs are already included.

Since these costs cannot be assigned directly to the individual baked goods, they are overhead costs that we use the intermediate step of Overhead surcharge have to offset against the cost unit.
Let's say your pretzels and cheese sticks cost you, as a salesman, about 3 euros each in production. The overhead surcharge is then calculated as follows:

This number means that you as the seller of the baked goods with costs of 3 euros (individual costs) plus 20% overhead surcharge, so have to calculate. So it makes sense to sell your pretzels and cheese sticks at a price of at least € 3.60 in order not to make any losses.

Below we show you some examples of overhead costs.

The salary of the employees in the purchasing department of the raw materials or the salary of the incoming goods warehouse clerk is called Material overhead, as the costs are related to the material.

On the Material overhead rate these costs are then offset against the products. Let's look at a quick example of this:

The monthly costs of the “Purchasing” cost center are 20,000 euros, which are made up of 15,000 euros in office rent and 5,000 euros in personnel costs for your only employee in purchasing. If he buys raw materials for the production of electric scooters worth 40,000 euros per month, then the 20,000 euros overhead costs are allocated to the 40,000 euros. The Material overhead surcharge is then .

This percentage means that for an electric scooter in which a material value of 500 euros was built, 250 euros () must be added, so that the material costs total 750 euros.

Other examples of material overheads would be, for example, the attachments for the painting machine, which paint a large number of different electric scooters and therefore cannot be assigned to a single product.

Rental costs represent, for example, overheads and at the same time also fixed costs, since they are incurred regardless of the production volume. Since they cannot be assigned to a single product, they are also overheads. So if you need a production machine for the production of your giant pretzels that has to be written off, this sum cannot be assigned directly to the cost unit “pretzel”.

Incidentally, the costs of depreciation or electricity costs of the warehouses fall under the concept of Manufacturing overhead. These are overheads incurred in connection with manufacturing or production. These costs together with the direct production costs form the Manufacturing costs.

Under the Administrative overheads includes all overheads associated with the administration of a company, such as the costs of management, accounting, etc. Since these costs are incurred for all of the company's products, they cannot be assigned to a single cost unit.

Costs for your sales force or any other costs incurred in selling the products are called Distribution overheads treated as long as they cannot be directly assigned to a product. As with the other overheads, the surcharge rate allocates these costs to the individual products.

In most cases, the term overhead refers to the cost bearers, which is why they are called Cost unit overheads can call.