What is overhead?
Overhead costs support the whole business rather than a single sale. A bakery's flour is a direct cost; its shop rent and accountant's fees are overhead.
Types of overhead
- Fixed overhead: stays the same regardless of output, such as rent, insurance and salaries.
- Variable overhead: changes with activity, such as utilities in a factory or card processing fees.
- Semi-variable overhead: a fixed base plus a variable element, such as a phone plan with usage charges.
By function:
- Administrative overhead: accounting, HR, office costs
- Selling overhead: marketing, sales salaries
- Manufacturing overhead: factory rent, equipment depreciation, supervisors
Overhead rate
To include overhead in pricing or [job costing](/glossary/job-costing), businesses calculate an overhead rate:
Overhead rate = Total overhead ÷ Allocation base (for example, labour hours or direct cost)
Example
A workshop has $120,000 of annual overhead and 8,000 billable labour hours. Its overhead rate is $15 per labour hour, added to every job's cost.
Why it matters
Underestimating overhead leads to underpricing. Tracking overhead as a percentage of revenue helps keep the business lean as it grows.