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Definition: Overhead

Overhead are the expenses of a business which cannot be directly attributed to the production of the product or delivery of a service. All non-labour expenses which are required for the operation of the business are associated with Overhead. Overhead can be categorized into:

  1. Fixed Expenses: These are the expenses that are independent of the amount of production and are fixed to a particular amount to be paid at regular intervals of time. These expenses may include depreciation of machines, rent, salaries of workers, membership subscriptions etc. They remain independent of the revenues of the company.
  2. Variable Expenses: These are the expenses that are associated with the amount of production and sales and may fluctuate over time. Promotional costs, raw materials, packaging, advertising etc. are few examples of variable costs.

Overhead costs can hence be simply distinguished as the costs that don't directly generate revenues. It is essential to watch the overhead costs because they can significantly large reducing the total profits and net income as they are not directly related to the company's revenues.

Hence, this concludes the definition of Overhead along with its overview.


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