Understanding Overheads Expenses

Knowing about cost price, selling price and rates of profit and loss, let us move a step ahead and know something about those expenses which add extra value to the cost price of a commodity. These extra expenses include shipping and delivering charges of commodities, insurance, repairs, rent, taxes, etc. These extra expenditures are known as overhead expenses.

Example One

Lets understand this better with an example. Suppose a shopkeeper buys an almirah from a retailer at a cost price of Rs 12,000. He needs to spend Rs 300 on its transportation. Then he spends Rs 500 on its maintenance. Now, the extra amount that the shopkeeper pays other than the cost price, i.e., in transportation and maintenance, is known as overhead expenses. All these extras will be added into the cost price of the almirah. So, the total cost price of the almirah becomes Rs 12,000 + Rs 300 + Rs 500 = Rs 12,800. Now, the shopkeeper sells this almirah at a price of Rs 13,500 to a customer. Hence, in the deal the shopkeeper has a profit of Rs 700.

Example Two

Suppose an exporter buys goods from India at a total cost of $4000. He then takes them to Europe and sells these goods at a total price of $5500. If we directly look at the cost price and selling price of the goods then it seems as if the exporter made a profit of $1500 (profit = selling price – cost price). Does he really make a profit of $1500? If we look at the problem we would find that actually he didn’t make a profit of $1500. He must have spent some money on the transportation of goods from India to Europe. He must have paid his traveling expenses. If include all these expenses are included then he might be at a loss or so. So, to find exact profit or loss we need to consider these extra expenses known as overhead expenses.