Overhead

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DEFINITION of 'Overhead'

An accounting term that refers to all ongoing business expenses not including or related to direct labor, direct materials or third-party expenses that are billed directly to customers. Overhead must be paid for on an ongoing basis, regardless of whether a company is doing a high or low volume of business. It is important not just for budgeting purposes, but for determining how much a company must charge for its products or services to make a profit.

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BREAKING DOWN 'Overhead'

For example, a service-based business that operates in a traditional white-collar office setting would have overhead expenses such as rent, utilities and insurance.

Overhead expenses can be fixed, meaning they are the same from month to month, or variable, meaning they increase or decrease depending on the business's activity level. They can also be semi-variable, meaning that some portion of the expense will be incurred no matter what, and some portion depends on the level of business activity. Overhead can also be general, meaning that it applies to the company's operations as a whole, or applied, meaning that it can be allocated to a specific project or department. These expenses are typically found on a company's income statement.

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RELATED FAQS
  1. In what instances does overhead qualify for certain tax allowances?

    Businesses are just as keen as anyone else to keep their tax burdens low by any means possible. Overhead expenses often qualify ... Read Full Answer >>
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    A long tail becomes profitable because the costs to produce, market and distribute a product or service in a niche are low, ... Read Full Answer >>
  3. What is the difference between earnings and profit?

    Earnings, specifically retained earnings, and profit are often used as synonyms in corporate finance, although they are different ... Read Full Answer >>
  4. How is work in progress (WIP) typically measured in accounting?

    Work in progress, also known as work in process, is usually measured and categorized as a current asset or a long-term asset ... Read Full Answer >>
  5. How is overhead distributed through total absorption costing?

    Through total absorption costing, overhead is distributed into indirect costs incurred from the manufacturing and production ... Read Full Answer >>
  6. What is the difference between prime cost and conversion cost?

    Prime costs and conversion costs are relied upon heavily in the manufacturing sector as a metric to determine efficiency ... Read Full Answer >>
  7. How is absorption costing treated under GAAP?

    Under generally accepted accounting principles (GAAP), absorption costing is required for external reporting. All normal ... Read Full Answer >>
  8. What are the differences between brand name drugs and generic drugs?

    Companies can produce their own version of brand name drugs after the drug's patent has expired; these are referred to as ... Read Full Answer >>
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    Online banking offers a convenient alternative to keeping your checking account with a brick-and-mortar bank. With an online ... Read Full Answer >>
  10. How does fixed overhead differ from varied overhead?

    Overhead costs are ongoing expenses a business incurs in its operations. They must be paid even if a company has a low volume ... Read Full Answer >>
  11. Why is overhead cost allocation sometimes manipulated on an income statement?

    Overhead cost is sometimes manipulated on an income statement to make the company appear to be performing better than it ... Read Full Answer >>
  12. What's the difference between cost of goods sold (COGS) and cost of sales?

    Fundamentally, there is almost no difference between a company's listed cost of goods sold (COGS) and cost of sales, otherwise ... Read Full Answer >>
  13. What's the difference between profit margin and markup?

    Profit margin and markup are two different accounting terms that are often confused and even used interchangeably. In some ... Read Full Answer >>
  14. What are the differences between operating expenses and overhead expenses?

    Several types of expenses affect profits for a business including equipment costs, inventory and facilities costs. There ... Read Full Answer >>

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