Overheads

Overheads are ongoing business expenses that cannot be traced directly to a specific product or service. They arise from the general operation of the business and are incurred even when production is low. Common examples include rent, utilities, depreciation, insurance, and salaries of non-production staff.

Overheads are often categorized as fixed, variable, or semi-variable. Fixed overheads, such as lease payments and salaried management, do not change with short-term production volume. Variable overheads, like utilities tied to activity, and semi-variable costs, which contain both fixed and variable elements, are more responsive to activity levels. Other typical items include maintenance, office supplies, advertising, and administrative costs.

In cost accounting, overheads are allocated to cost objects (such as products or services) using an overhead rate or activity-based costing. The rate is usually based on a chosen measure of activity, such as labor hours, machine hours, or units produced. This allocation helps determine product cost and informed pricing decisions.

Understanding overheads supports budgeting, variance analysis, and profitability assessment. Because overheads must be recovered in prices regardless of output, accurate estimation and control of overheads influence competitiveness and financial reporting.