Month End Glossary

Overhead

Overhead refers to the ongoing business expenses that are not directly related to producing goods or services.

Overhead represents the essential costs required to maintain the operations of a business but are not tied directly to the product or service production. These include expenses such as rent for physical office space, utilities like electricity and water, salaries of administrative staff, and office supplies. For instance, consider the scenario where a manufacturing company produces furniture; the cost of wood and labor to create the furniture is not overhead but direct costs, while the electricity bill for lighting the factory is an overhead cost. Efficient management of overhead expenses can positively impact a company's profitability, as reducing these costs effectively increases the margin available for profit. Overhead is often categorized into fixed, variable, or semi-variable expenses, depending on whether they fluctuate with the level of business activity. Examples of overhead in use could include, "We need to reduce our overhead to increase net profits," or "Allocating overhead costs accurately is crucial in determining the true cost of each product or service."

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