what is overhead 
overhead refers to the ongoing business expenses not directly attributed to creating a product or service it is important for budgeting purposes but also for determining how much a company must charge for its products or services to make a profit in short overhead is any expense incurred to support the business while not being directly related to a specific product or service investopedia paige mclaughlinunderstanding overheada company must pay overhead on an ongoing basis regardless of how much or how little the company sells for example a service based business with an office has overhead expenses such as rent utilities and insurance that are in addition to direct costs such as labor and supplies of providing its service expenses related to overhead appear on a company s income statement and they directly affect the overall profitability of the business the company must account for overhead expenses to determine its net income also referred to as the bottom line net income is calculated by subtracting all production related and overhead expenses from the company s net revenue also referred to as the top line types of overheadoverhead expenses can be fixed meaning they are the same amount every time or variable meaning they increase or decrease depending on the business s activity level overhead expenses can also be semi variable meaning the company incurs some portion of the expense no matter what and the other portion depends on the level of business activity fixed overhead is overhead costs that remain static for a long period of time and do not change as business activity ebbs and flows regardless of if business is growing or slowing fixed overhead remains the same examples include rent depreciation insurance premiums office personnel salaries and the cost of licenses variable overhead consists of the overhead costs that fluctuate with business activity these are overhead costs that are not static as business activity increases so does variable overhead as business activity slows the variable overhead decreases examples include office equipment shipping and mailing costs marketing legal expenses and maintenance semi variable overhead is a combination of fixed and variable overhead where some costs are incurred regardless of business activity but may also increase if business activity grows examples of semi variable overhead include commissions and utility costs for utilities a base amount is charged and the remainder of the charges are based on usage other categories of overhead may be appropriate depending on the business for example overhead expenses may apply to a variety of operational categories general and administrative overhead traditionally includes costs related to the general management and administration of a company such as the need for accountants human resources and receptionists selling overhead relates to activities involved in marketing and selling the good or service this can include printed materials and television commercials as well as the commissions of sales personnel other categories such as research overhead maintenance overhead manufacturing overhead or transportation overhead also apply examples of overheadsome common examples of overhead costs companies must assume are rent utilities administrative costs insurance and employee perks the costs associated with maintaining the office or manufacturing space companies must have in order to perform their business is an example of overhead this includes rent as well as utilities such as water gas electricity internet and phone service additional costs such as a subscription to virtual meeting platforms like zoom zm also must be factored into a company s overhead administrative costs are often one of the most expensive facets of a company s overhead this can include the cost of stocking the office with the necessary supplies the salaries of office associates and external legal and audit fees administrative costs can range from the supply of toilet paper in the office restroom to hiring an external audit firm to ensure the company complies with industry specific regulations depending on the company businesses are required to hold many different types of insurance in order to operate properly these can include basic property insurance to protect the company s physical assets from fire flood or theft as well as professional liability insurance health insurance for its employees and car insurance for any company owned vehicles while none of these costs are directly related to generating revenue for the company by providing a good or service the business is often legally mandated to purchase these various types of insurance if it wishes to operate within most jurisdictions many larger companies offer a range of benefits to their employees such as keeping their offices stocked with coffee and snacks providing gym discounts hosting company retreats and company cars all of these expenses are considered overhead as they have no direct impact on the business s goods or services special considerationsoverhead is typically a general expense meaning it applies to the company s operations as a whole it is commonly accumulated as a lump sum at which point it may then be allocated to a specific project or department based on certain cost drivers for example using activity based costing a service based business may allocate overhead expenses based on the activities completed within each department such as printing or office supplies 