Overhead

Overhead costs are the indirect expenses that a business incurs to maintain its operations, but which cannot be directly traced to the production of specific goods or services. These costs are essential for the day-to-day functioning of the business, regardless of whether the company is producing or selling products.

Key Features: Indirect Nature Distinction from Operating Expenses Feature Operating Expenses Overhead Costs Direct link to production Yes No Varies with production level Yes Not necessarily

Examples Raw materials, direct labor Rent, utilities, office salaries

Fixed vs Variable Overheads: Fixed Overhead: Costs that remain constant regardless of production (e.g., rent, insurance) Variable Overhead: Costs that vary slightly with business activity (e.g., electricity, consumables)

Importance: Ensures smooth business operations Helps in budgeting and cost control Critical for pricing decisions and profitability analysis Coverage Requirement Overhead costs must be paid even if the business earns no revenue They are a baseline expense that sustains business infrastructure

Example: A small manufacturing company has monthly overhead costs: Rent: ₹50,000 Electricity: ₹10,000 Administrative salaries: ₹40,000 Even if no products are sold that month, the company must cover ₹1,00,000 in overhead costs to keep operations running.