What is Overhead?
Overhead is the sum of all expenses a business has that are not directly associated with producing goods or services. It includes many costs such as rent, taxes, and employee benefits. Overhead can also refer to the costs associated with running a business, such as insurance, marketing, and administration costs. Overhead is an important part of a company’s budget because it affects the company’s ability to remain profitable.
Types of Overhead
There are several types of overhead that businesses must consider when creating a budget. These include:
- Fixed Overhead: These are costs that remain the same regardless of the level of production or sales. Examples include rent, insurance, and property taxes.
- Variable Overhead: These are costs that change depending on the level of production or sales. Examples include materials, labor, and shipping costs.
- Indirect Overhead: These are costs that do not directly contribute to the production or sale of a product or service. Examples include advertising, legal fees, and office supplies.
Importance of Overhead
Overhead is an important part of a company’s budget and affects its ability to remain profitable. Without proper budgeting for overhead costs, a company could end up spending more than it earns, leading to financial losses. It is important for businesses to understand their overhead costs and how these costs affect their bottom line.
Conclusion
Overhead is an important part of a business’s budget and affects its ability to remain profitable. By understanding the different types of overhead, businesses can create a budget that takes into account all of the costs associated with running their business.