Updated: Aug 17, 2022
It is vital to understand overhead costs in business operations. Other costs not related to labor, raw materials, and equipment are known as overhead costs. We should not overlook overheads because they may account for a large part of total costs and harm net income.
In this article, you will learn through the definition, examples, and calculation of overhead costs.
1. What Are Overhead Costs?
What is an overhead cost? The cost incurred by your business daily is known as an overhead cost. Overhead costs are more complicated than direct costs because they are not linked to your products’ results. Overhead costs come in three varieties: fixed, variable, and semi-variable. While variable overheads fluctuate, fixed overheads remain the same every time. Finally, semi-variable overheads include a mixture of a fixed cost and become variable once that level exceeds.
Want to know more about overhead types? Check this link for more information.
An income statement will list its overhead costs deducted from revenue to calculate net income.
2. Overhead Cost Examples:
Some common overhead expenses are rental fees, utilities, insurance, technology expenses, telephone bills, and legal fees.
In any case, a business's overhead expenses vary depending on the type of business. The examples are below:
In Construction Industry, overheads can include:
Monthly rent for facilities like offices.
Wages and benefits for full-time staff.
Insurance coverage for both people and machinery.
Utilities like gas, water, and electricity.
3. How To Calculate Overhead Costs For Your Business?
There are many methods to determine overhead expenses, but the following formula is the easiest to use:
Overhead cost = Allocation measure/ Indirect costs
Allocation measure: is any assessment that is necessary for the production of the good or service. It could be the quantity of machine or direct labor hours for a given item or time.
Indirect costs: expenses, such as rent and utilities, administrative expenses, salaries for workers,...
We hope this article will help you understand the overhead cost definition and how overhead costs work. If you want to simplify the bookkeeping process for your small business, Irvine Bookkeeping is here to help.
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