In this article we will discuss about the treatment of special items of overheads in cost accounts.

Material Handling Expenses:

These expenses are incurred while unloading the raw materials received from supplier, storing the raw materials, handling the raw materials to work place, handling of work-in-progress, storage of finished goods etc. It also includes costs incurred for weighing salaries of personnel involved in material handling, wear and tear of weighing equipment.

These costs are apportioned on the basis of physical quantities of different materials and goods handled in the factory. The stores overhead costs are apportioned to raw materials and finished goods as a percentage of issue rates. Other handling expenses are recovered through overhead recovery rates.

Market Research Expenses:

Market research cost is an item of selling overhead, incurred for market intelligence to ascertain the tastes and habits, market penetration of product, increase in demand of existing products, competitive situation, trading practices, distribution channels, customers requirements, existing and potential market for the product etc.


If the market research expenses are incurred for a single product it is absorbed into that particular product cost. If it is incurred for the product range for the enterprise as a whole, then the market research expenses are to be apportioned to different products in the proportion of sales value and absorbed into respective product cost.

If the market research cost is substantial, it will be treated as deferred revenue expense and is taken into future period and absorbed when sales or production takes place. Sometimes market research expenses are incurred for raw material availability, such expenses will be allocated or apportioned to purchase department and it is recovered through overhead rate of purchase department.

Subscriptions and Donations:

The treatment suggested for subscriptions and donation in Cost Accounts as follows:

a) If these expenses are incurred for the benefit of or welfare of workers, it is treated as Production Overhead.


b) If subscriptions and donations for any technical and research institutions for obtaining data relating to technical, production or scientific nature, it is considered as Production Over­head.

c) If subscriptions to journals etc. for obtaining market data which help in increase of sales, it is considered as Selling Overhead.

d) If the subscriptions and donations not incurred for the benefit of employees or the organization, it should be excluded from the Cost Accounts.

After Sales Service Costs:

The costs are incurred for providing service to the customers after the sales took place during the warranty period. If the costs are incurred during the period of guarantee given to the customer, it is to be borne by the company, and hence it is treated as production overhead absorbed into product cost by applying predetermined absorption rates. If the after sales services costs are incurred after the guarantee period for which the organization will charge for the services rendered, then such costs are treated as Selling Overhead.

Royalties and Patent Fees:


The royalties and patent fees are payable for the use of technology, skill, brand, intellectual property rights etc. made in the form of periodical rent or based on the number of units produced or sold.

If it is based on sales, the expenditure is charged to Selling Overhead. If it is a fixed periodical rent, it is treated as Production Overhead. If it is payable on number of units produced, the expenditure is treated as a direct expense or chargeable expense and is forming part of the cost of the product.

Training Costs:

The training costs are incurred for training the workers, apprentices, office, administrative and selling staff. The training expenditure incurred for training the workers, apprentices and other production staff is treated as Production Overhead. If it is incurred for training the office and administrative staff, it is considered as Administration Overhead.

The expenses incurred for training the sales staff is treated as Selling Overhead. If there is any in-house training college or centre is giving training, cost of running the centre or college is apportioned to the cost centres based on the number of personnel trained or on the basis of wages and salaries paid etc.



Taxation is an appropriation of profit earned by the organization and any payment of taxes is excluded from the Cost Accounts. But the taxes will also be considered for planning and decision making exercises wherever it is necessary and appropriate for special purposes.

Financing Charges:

The finance charges like interest on working capital facilities from banks, interest on term loan for acquisition of fixed assets, interest on debentures etc. is payable by the company. Where financing charges are payable to outsiders on borrowings for acquisition of fixed assets, these charges are included in cost of Fixed Assets.

If the financing charges are payable for financing working capital, then these charges are included in Cost of Inventories. Interest on capital provided by the owners is excluded from Cost Accounts except for comparing or evaluating profitability of alternative investments. If the charges are payable for storing the materials like timber, wine etc. the charges are included in the cost of materials stored.

Major Repairs to Equipment:

The major repairs, if it prolong the useful life of an asset, the costs incurred on it is to be added to the existing value of assets and periodical depreciation is charged on the overall cost of the asset.


If the repair charges are incurred for upkeep and maintenance of the machinery and if it does not prolong the life of the asset, these expenses are treated as Production Overhead and is charged to the respective cost centre as repairs and maintenance and recovered from the current period production. If the amount incurred is substantial, it is treated as deferred revenue expenditure carried forward to the subsequent accounting periods for write off.

Cost of Tools:

Tools are classified into:

(a) Large tools, and

(b) Small tools.


The cost of large tools are capitalised like any other machine and depreciation is provided on it each accounting period over its useful economic life.

The cost of small tools are treated in any of the following three methods in Cost Accounts:

i. Capitalization Method:

Under this method, the cost of small tools is capitalised and depreciation is recovered as Production Overhead. If the life of small tools is relatively small, this method is not suitable.


ii. Revaluation Method:

Under this method, the small tools are revalued at the end of each accounting year and the difference between original cost and the revalued cost is charged as Production Overhead.

iii. Write off Method:

Under this method, the cost centre drawing such tools is debited with the value thereof. Alternatively, the total cost of tools is accumulated and apportioned to various cost centres on suitable basis.

Bad Debts:

When the company allow credit to its customers as part of its selling policy, some credit sales may turn bad due to default by the customers intentionally or otherwise. As a safeguard, a part of such default amount is treated as bad debt is recovered as selling overhead and absorbed into product cost. If the bad debt is abnormal in nature, the abnormal portion in excess of the standard normal portion should be excluded from cost accounts and transferred to Costing Profit & Loss Account.

Notional Rent:

Notional rent is a cost included in the Cost Accounts so as to represent a benefit enjoyed by the organization even though no actual cost is incurred for rent. The company owns premises does not pay rent, but it is considered as notional charge in the Cost Accounts for comparability of cost with different accounting periods and with other organizations. This would reflect the accurate cost of cost centre or cost unit. It is a reasonable or nominal charge included in the Cost Accounts for the owned premises as if it is a rented premises.

Packing Expenses:


The packing is classified into:

(i) Primary packing, and

(ii) Secondary packing.

The ‘primary packing’ is done when the material is packed in tins, bottles, jars, etc., without which a product cannot be sold. For example, jam is packed in bottles, baby food packed in tins, beverages in bottles etc. The costs incurred on primary packing material are treated as part of direct material cost.

If the packing is made to facilitate the transportation and distribution of the finished product, it is called ‘ secondary packing’ and the cost incurred for this is treated as Distribution Overhead. Sometimes, cost is incurred on packing the product to make it more attractive to the customers to increase sales. This cost is treated as advertisement cost and is included in Selling Overhead.

Data Processing Cost:

In the environment of processing information with the help of computers, the data processing cost represents the cost incurred for processing data relating to accounts, secretarial, personnel, finance, marketing, sales etc. This may be done either utilizing in house facilities or hiring outside facilities.

The cost incurred is accumulated for separate service centre if in-house facilities are made available. Where the costs of data processing centre or hiring charges are identifiable to a particular department or activity it should be charged with its portion of cost. In case of common costs incurred for service of all departments, the data processing cost should be apportioned to different departments on equitable basis.

Stores Overhead:

The stores department in an organization perform the function like receipt of material and stores items purchased, storing and issue of materials and stores items to different departments.

The stores is considered as a separate cost centre and the stores expenditure like rent of store, salaries and wages of stores personnel, freight, carriage inwards, insurance etc. are collected separately for the stores and will be apportioned to other cost centres.

The following bases are used in apportionment of stores overhead:

(a) Number of stores requisitions,

(b) Value of material requisitioned, and 

(c) Standard predetermined stores overhead absorption rate.

Erection and Dismantling of Plant and Machinery:

The costs incurred on erection and dismantling of plant and machinery are treated in cost accounts as follows:

(a) The costs incurred on erection of plant and machinery is capitalised and treated forming part of capital cost and depreciation is recovered on the total cost

(b) If the plant and machinery is required to be shifted to different locations, the costs incurred in layout and shifting is treated as production overhead. When such costs are substantial, it may spread over a period of time as deferred revenue expenditure.

(c) If the asset is replaced, before its useful economic life, with a new machine, the written down value of the asset less the scrap value plus the cost on dismantling is treated as capital loss and charged to profit and loss account. However, the erection cost of new machine is capitalised.

(d) If expenses of dismantling and re-erection are incurred due to faulty planning or due to abnormal factors, then such expenses are charged to Costing Profit and Loss Account.

Transport Cost:

The classification of transport costs and their treatment in cost accounts is given below:

(a) The costs incurred to bring the materials to the production site is included in cost of materials.

(b) The costs incurred for bringing the plant and machinery, equipment etc. is added to the capital cost of respective asset and depreciation is recovered.

(c) The cost of dispatch of finished goods is treated as distribution overhead.

(d) The costs incurred for internal movements within work are initially charged to specific cost centres and thereafter apportioned to different production and service centres on the basis of services rendered.

Insurance Cost:

The treatment of insurance cost is categorized into the following:

(a) Insurance premium on storage-cum-erection and commissioning is capitalised to the asset value.

(b) Premium on transit of materials is included in cost of materials.

(c) Premium on transit of finished products is treated as distribution overhead.

(d) Premium on fire and breakdown of machinery policy is treated as production overhead.

(e) Premium on loss of profit policy due to fire and breakdown of machinery is treated as production overhead.

(f) Premium on miscellaneous policies like vehicles, burglary, accident etc. are treated as administration overhead.

(g) Premium on raw materials and stores is treated as production overhead.

(h) Premium on warehouse and finished stock is treated as distribution overhead.