What is Overhead?
Overhead refers to the ongoing costs of running a business that are not directly related to creating or selling a product or service.
It includes expenses like rent, utilities, office supplies, repairs or maintenance, insurance, taxes, and so on.
Knowing these costs is important for budgeting because it reflects the minimum income a business must earn to break even, even if they don’t make or sell any products.
For example, if a business’ overhead costs for a month are $50,000, then the company’s owners know that the business must earn a minimum of $50,000 in revenue just to cover the cost of doing business.
Define Overhead in Simple Terms
Overhead costs are generally fixed, although some may be variable with the level of production.
For example, if a company goes from running a factory only during business hours to running the factory 24/7, then the cost of utilities will go up.
Overhead costs are recorded on a company’s income statement.
Overhead is often segmented into different categories.
Administrative overhead can apply to the accountants, human resources representatives, and managers needed to run the business.
Selling overhead applies to the cost of selling goods or services, such as marketing and advertisements.