Overhead – What is overhead?
Overhead refers to ongoing expenses that are required to run a business but cannot easily be attributed to a specific business activity, product, or service.
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Because overhead cannot be directly linked to activities, products, or services, it does not directly generate profit.
However, overhead provides necessary and important support for profit-making activities and is therefore a key expense that should be considered within budgets and pricing strategies.
Different types of overhead
There are two main categories of overhead: administrative overhead and manufacturing overhead. If overhead can be traced to manufacturing or production, it is considered a manufacturing overhead; if overhead can be traced to any other area of the business, it is categorised as administrative overhead.
Manufacturing overhead includes manufacturing salaries, depreciation of assets and equipment, utility bills, and rent for factories or machinery, whilst administrative overhead includes administrative salaries, insurance, and legal fees.
Depending on the nature of the company, there may also be other categories, such as marketing overhead, maintenance overhead, or research overhead.
These expenses are treated as overhead because are not directly responsible for any profit, and must be paid regardless of production or sales levels.
Overhead and accounting
The cost of overhead is a key consideration for all businesses. Knowing how much is spent on overhead lets companies set budgets and decide how much to charge customers for goods and services.
Overhead costs usually appear on an a company’s income statement and balance sheet. Because overhead costs are usually paid on a weekly, monthly or quarterly basis, they are considered a current liability on the balance sheet.
Overhead in Debitoor
With Debitoor accounting & invoicing software, it’s easy to keep track of overhead costs and other business expenses. When you create a new expense, you can select which category it falls under, then see an overview of where your money is being spent.
Find out more about registering expenses in accounting software or try Debitoor free for 7 days.