In business, overhead
or overhead expense
refers to an ongoing expense of operating a business; it is also known as an operating expense
. Overheads are the expenditure which cannot be conveniently traced to or identified with any particular cost unit. Therefore, overheads cannot be immediately associated with the products or services being offered, thus do not directly generate profits. However, overheads are still vital to business operations
as they provide critical support for the business to carry out profit making activities. For example, overhead costs such as the rent for a factory allows workers to manufacture products which can then be sold for a profit. Such expenses are incurred for output generally and not for particular work order; e.g., wages paid to watch and ward
staff, heating and lighting expenses of factory, etc. Overheads are also very important cost element along with direct materials and direct labor.
Overheads are often related to accounting concepts
such as fixed costs and indirect costs.
Overhead expenses are all costs on the income statement
except for direct labour, direct materials, and direct expenses. Overhead expenses include accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities.
There are essentially two types of business overheads. Administrative overheads and manufacturing overheads.