Overhead

Overhead refers to the ongoing business expenses that are not directly attributable to producing a specific good or service. These costs support operating activities and are incurred regardless of the level of production or sales. Common overhead items include rent, utilities, insurance, administrative salaries, depreciation, and office supplies.

In accounting, overhead is contrasted with direct costs such as raw materials and direct labor. Overhead is typically allocated to products or services using an overhead rate based on a chosen cost driver, such as labor hours or machine hours. Overhead can be fixed, meaning it does not change with volume in the short term, or variable, meaning it fluctuates with activity.

Manufacturing overhead comprises indirect production costs that are not traced to a single product, including factory rent, equipment maintenance, indirect labor, and depreciation of production facilities. In service businesses, similar categories exist under operating or administrative overhead, reflecting costs that support overall operations rather than a specific output.

Measurement and management: Methods to assign overhead include plant-wide rates, department-based rates, and activity-based costing. Proper allocation affects product costing, pricing, profitability analysis, and budgeting. Companies may seek to minimize overhead without compromising capability and quality.

In computing and communications, overhead describes auxiliary resources required to manage operations, such as protocol headers, metadata, or the time and memory needed for bookkeeping tasks. While overhead increases resource use, it is often necessary for reliability, control, and interoperability.

Related concepts include fixed costs, variable costs, cost allocation, and overhead rate, which together help determine how overhead influences pricing and financial planning.