What is Overhead?
Overhead refers to the business expenses involved in its regular operations. Unlike operating costs, overheads are not related to the costs of specific business activity. In lieu, they facilitate the general revenue-generating undertaking of the enterprise. For instance, an appliance retail company reimburses a rent for the space in which the showroom is located. Here, premium rent is one of the overheads a business has to consider. Overhead costs must be paid by businesses on an ongoing basis, irrespective of whether the company is able to sell its products/ services at a given point.
Types of overheads
The main types of overheads incurred upon the businesses vary depending on the industry in which the business operated or the activity it undertakes. Types of overheads in businesses are as follows:
- Fixed overheads: These costs remain consistent every month and never change with the alterations in the levels of business activity. Some examples of fixed overheads are asset depreciation, property taxes, rent, salaries, etc.
- Semi-variable overheads: semi-variable overheads may be incurred upon the businesses at any time however, the costs may vary depending on the activity levels of the business. Such overheads pose a base rate that a business needs to pay regardless of the activity level in addition to the variable cost which is determined by the usage level. For example, vehicle usage, sales commissions, utility costs, etc.
- Variable overheads: These expenses vary with the activity levels of a business and thus, may go high or come down with different levels of business activity. When the business activity levels are high, the expenses will surge while overheads will decline as the business activities reduce.