This classification is very important for accounting and control. Based on behavioral patterns, overhead can be divided into the following categories:
a. Fixed cost: fixed cost represents indirect cost, which remains constant in total within current budget period regardless of changes in volume of activity. This concept of fixed cost remains valid within certain output and turnover limits. Fixed overhead does not vary in total. The incidence of fixed overhead on unit cost decreases, as production increases and vice-versa. Examples of fixed overhead are: rent of building, depreciation of plan and machinery, pay and allowances of managers, secretary and accountants, canteen expenses, audit fees etc. Fixed overheads have been called period cost‘ or stand-by cost‘ because these costs will be incurred even when no production activity take place.
b. Variable cost represents that part of indirect cost, which varies with change in volume of activity. It varies in total but its incidence on unit cost remains constant. The examples of variable overhead are: indirect material cost, indirect labour cost, power and fuel, internal transport, lubricants, tools and spares.
c. Semi-variable cost: it is that part of overhead that is partly fixed and partly variable. These overheads show mixed relationship, when plotted against volume. Semi-variable overheads may remain fixed within certain activity level, but once that level is exceeded, they vary without having direct relationship with volume change. Semi variable costs do not fluctuates in direct proportion to volume. An example of the semi variable overhead cost is the earning of an employee, who is paid a salary of Rs 500 per month (fixed0 plus a bonus of Rs 0.50 for each init completed (variable0. if he increases his output from 1000 units to 1500 units, his earnings will increase from Rs 1000 to Rs 1250. an increase of 505 in volume brought about only 25% increase in cost.
Differential cost- differential cost are defined as the difference in total cost between any two acceptable alternatives. Key emphasis in differential costing is on change in total costs associated with alternative decision. Incremental cost is the increase in cost from one alternative to another. Decremental cost is the decrease in cost due to alternative under consideration. Differential cost is a term broader than incremental cost or decremental cost. The term differential costing encompasses both the terms incremental costing and decremental costing.
CIMA has defined is as ―the value of a benefit sacrificed in favour of an alternative course of action.‖ If accepting an alternative requires use of facilities or resources, which are used for some other purpose, there arises an opportunity cost. The opportunity cost is measured by the profit, which would have been earned, if the resources or facilities had been used for second best alternative. It is not easy to measure opportunity cost in all cases, but the relevance of opportunity cost in decision-making cannot be disputed.