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. 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.Overhead Definition
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Overhead refers to the ongoing costs of running a business that are not directly related to creating or selling a product or service.
Overhead 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.
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.
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.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.