Overhead

Overhead refers to the non-manufacturing expenses a business incurs for the company's operation but are not directly tied to producing goods and services. As a rule, these expenses will range from rent, electricity bills, salaries for the administrative staff, supplies, and equipment maintaince. The overhead cost can be regarded as a must-have cost concerning the infrastructure and support systems necessary for running the operations of a business. Still, it will not generate any kind of actual product or service. Understanding and successfully managing overhead costs can be the key to a firm's profitability and efficiency. Businesses that judiciously manage operational expenses can optimize their resources, and the cost-effectiveness of the revenue-generating activities and allocation of the funds will improve. Continuous supervising of overhead costs periodically enables a business to detect areas where costs can be cut down smartly and allows the organization to look for ways to optimize its operations and maximize financial performance.

Example

An illustration of Overhead costs can be seen here at a manufacturing company. Those direct costs, such as raw materials and labor, that can be calculated correctly are the necessary production process. Such rentals may involve a lease for factory space, wages of administrative personnel, utilities to drive the machines, maintenance of the equipment, and insurance premiums. For example, the wages of the assembly line supervisors and the machinery depreciation means that such costs are classified as overhead expenditures. The company's financial well-being heavily depends on the ability to grasp and handle these contingency expenses, as any excessive overhead can end up eroding the profits. Through operation optimization and decreasing the non-value added costs, the organization will be better positioned to be competitive in the market and generate more profit.