Overhead

Overhead covers the costs of keeping the business operating. These costs must be paid regardless of which products are made or which customers are served.

Overhead is often divided into categories. Manufacturing overhead includes indirect factory costs, such as factory rent, equipment maintenance and supervisors' wages. Administrative overhead includes office rent, accounting, legal and human resources costs. Selling overhead includes marketing and sales office costs.

For example, a small consulting firm might have monthly overhead of 25,000 for office rent, software subscriptions, insurance and administrative staff, regardless of how many client projects it is working on.

To set prices that cover all costs, businesses usually allocate overhead to products or services. A consulting firm might add an overhead charge to each hour billed to clients.

Keeping overhead under control is important for profitability. High overhead means a business needs more sales just to break even. When revenue falls, overhead is often harder to reduce than direct costs, which is why companies facing difficulties often focus on cutting it.