What Is Overhead?
Overhead is the ongoing cost of operating a business that isn't directly tied to producing a specific product or service — such as rent, administrative salaries, insurance, and utilities. It must be paid regardless of sales volume.
What overhead is and why it matters
Overhead covers the indirect costs that keep the lights on: the expenses a business incurs whether it sells one unit or a thousand. It's typically split into fixed overhead (rent, insurance — steady each period) and variable overhead (some utilities, supplies — moving with activity). Because overhead is largely fixed, it's central to break-even analysis: a business must generate enough contribution from sales to cover its overhead before it earns a profit. Understanding and allocating overhead correctly also matters for pricing and for knowing the true cost of serving a customer or running a product line.
A worked example
A manufacturer's monthly overhead includes rent $8,000, administrative salaries $20,000, insurance $2,000, and utilities $3,000 — $33,000 total, most of it fixed. If each unit contributes $50 after direct costs, the business must sell $33,000 ÷ $50 = 660 units per month just to cover overhead and break even. Every unit beyond 660 contributes $50 to profit.
How firms handle it today
Firms track overhead in the appropriate expense accounts and, for manufacturers, allocate it to products or jobs using a costing method so product profitability reflects a fair share of indirect costs.
Related terms
- Operating expenses
- Break-even point
- Expense
- Fixed asset
- COGS
FAQ
What's the difference between overhead and COGS?
COGS is the direct cost of producing goods; overhead is the indirect cost of running the business that isn't tied to a specific unit.
What are examples of overhead?
Rent, administrative salaries, insurance, utilities, office supplies, and depreciation on non-production assets.
What's the difference between fixed and variable overhead?
Fixed overhead stays constant regardless of activity (like rent); variable overhead changes with production or activity levels.