Variable Overhead

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DEFINITION

The indirect costs of operating a business that fluctuate somewhat with the level of business activity, but are incurred even if business activity is minimal. While most overhead costs such as rent, salaries and insurance are typically fixed, overhead costs that increase with higher business activity and decrease with lower business activity are termed as variable overhead. These usually consist of indirect material, indirect labor and other costs that cannot be directly allocated to a specific product, such as expenses for utilities and equipment maintenance.

INVESTOPEDIA EXPLAINS

For example, utility expenses for electric power are incurred by a manufacturing plant every month; the actual amount owed for such expenses depends on the level of manufacturing output. However, even if the plant produces no output in a given month – for reasons such as a labor dispute or shortage of a critical input material – it still needs to "keep the lights on" in order to keep the plant in working condition, and will be billed by the utility accordingly.


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