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What is Overhead Expenses?

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An overhead expense refers to the ongoing costs that are incurred by a business to support its operations and maintain its infrastructure. These expenses are not directly tied to the production or delivery of a specific product or service but are necessary for the overall functioning of the business.

Overhead expenses typically include items such as rent or lease payments for office space or manufacturing facilities, utilities (electricity, water, etc.), insurance premiums, salaries and benefits for administrative staff, depreciation of assets, office supplies, marketing and advertising costs, professional fees (legal, accounting, consulting), and general maintenance and repairs.

These expenses are considered indirect costs as they cannot be easily attributed to a specific product or service. Instead, they are allocated across the organization or specific cost centers based on predetermined methods, such as percentage of sales, square footage, or employee headcount.

Understanding and managing overhead expenses is important for businesses as they contribute to the overall cost structure and can impact profitability. Efficiently managing overhead expenses involves evaluating and optimizing each cost category to ensure they align with business goals and objectives.