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What is overhead?

Overhead costs are the expenses that a business sustains to keep its door open and running on a day-to-day basis. These costs are not directly related to the production or sale of goods or services, but they are still necessary for the business to function. Unlike operating expenses, which are directly related to the production or sale of goods and services, overhead costs are not directly tied to revenue. I.e., overhead costs must be paid even if the business is not making any profit. 

For Instance, a business that rents a retail space must pay rent even if it does not sell any products. The rent is an overhead cost because it is not directly related to the sale of the product.

Overhead Explained

Overhead expenses are the cost that a business must incur in order to operate, regardless of how much revenue it generates. These costs include rent, utilities, insurance, and other fixed costs. Overhead expenses are important to track because they can have a significant impact on a business’s profitability.

To calculate net income, a company must subtract all of its expenses, including overhead expenses, from its revenue. Net income is a measure of a company’s profitability and is an important metric for investors and creditors.

Types of Overhead

  1. Fixed Overhead - Fixed overhead costs are those that remain consistent month-to-month and remain unaffected by fluctuations in business activity levels. It includes salaries, rent, etc. 

  2. Variable overhead - Variable overhead refers to the variable manufacturing costs linked to business operations. These expenses vary with the change in production output.

  3. Semi-variable overhead - Semi-variable overhead expenses consist of a base rate that the company incurs at any activity level, in addition to a variable cost dependent on the extent of usage.


Examples of Overhead

  1. Administrative Overheads

  2. Rent and Utilities

  3. Employee Perks

  4. Sales and Marketing

  5. Research and Development