What are Overheads?

Overheads (Definition)

Overheads are costs that are incurred in the daily operations of a business. They may be traced to a specific cost unit or business activity, but they make no direct contribution to the bottom line of the organisation. Also known as “overhead costs," "overhead expenditures," or "operating expenses", these are costs that essential for the business to continue to operate. They include things like rent a business pays for their premises; administrative costs related to running the business, such as salaries for a receptionist or legal fees; and utilities bills, such as gas and internet. Overheads are categorised under three headings:

• Fixed overheads are the constant costs that don’t change, such as taxes and rent
• Variable overheads are the expenses that change with the business, increasing or decreasing, such as advertising costs and equipment repair
• Semi-variable overheads are a mix of both, they can come at any time and may have a base rate the company needs to pay, or that rate could fluctuate. Electricity and water bills are good examples of this.