Overheads form a material portion of total cost in nay production process or process of generating services. Pricing of products/services is essentially linked to cost of production or cost of generation of services. Accordingly, there is need for proper overhead analysis and charging appropriate share of overheads to products/services.
Any arbitrary overhead charge could either increase or decrease the level of identified cost. This may lead to wrong pricing of products. In case bigger share of overheads is charged to a product, that product may be wrongly considered as high cost product & accordingly higher price may be fixed. By this a product may lose its market competitiveness.
Thus while understanding the incidence of overheads, proper analysis of overheads & linking the overheads to products/services is very important. Cost information generated through overhead analysis is used for pricing decisions and measurement of profitability of products or services.
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