In business and finance, overhead refers to all ongoing business expenses. It is also called the ‘operating expense’. Overhead is an expense that has to be paid even when the business does not earn any revenue.
It is used for budgeting purposes and to find out how much a company should charge for its products or services in order to turn a profit.
Expenses that form part of the overhead include rent, utilities, travel expenditures, repairs, legal fees, insurance, advertising fees, telephone bills, electricity, labor burden, direct materials, in addition to third-party expenses that are billed directly to customers.
Overhead expenses have to be covered, regardless of how much or little money the business is making.
Overhead refers to all these expenses that keep a business operating.
Manufacturing overhead represents the costs that support manufacturing but are not linked to specific products or services.
These expenses can either be fixed or variable – some remain the same on a consistent basis, while others can increase or decrease depending on the activity level of a business.
According to nasdaq.com, overhead is:
“The expenses of a business that are not attributable directly to the production or sale of goods.”
Fixed overhead costs:
Fixed costs remain the same, regardless of the number of units produced or sold. Fixed overhead costs include rental costs, retail sales floor space, etc.
Variable overhead costs:
Variable overhead costs are those that do change when the number of units sold or manufactured changes. Examples include manufacturing machinery electricity, equipment utilities, materials handling wages, and production supplies.
Video – Fixed Overheads