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Overhead Costs

Overhead Costs are expenses that are not directly related to the business but are necessary for its operation. Overhead costs are incurred by any business and are an integral part of its activities. To better understand expenses, imagine that you have a production facility. In addition to expenses for equipment, maintenance, and employee salaries, you also have overhead costs. For example, you pay for employee insurance and use cleaning services to clean the premises. These expenses do not affect the production process itself, and the quality of goods does not depend on them, but they are necessary for normal operation.

Overhead costs are divided into three types:

  • fixed costs — recurring at regular intervals. For example, monthly payment for employee lunches;
  • variable costs — do not recur and can arise periodically. For example, if there are problems with plumbing in the office and you hire a specialist to deal with them. Next month, the problems will not recur, and the expenses will not be repeated;
  • semi-variable costs — they recur, but their size can vary each time. For example, expenses for taxis for employees who return home late. They depend on how many times the staff used this service: in one month, it may be 10 times, and in another — 6.

The business owner should strive to optimize overhead costs, but it is important to understand that it is impossible to completely eliminate them. First of all, it is important to keep accurate records of all expenses to understand the current situation with them and assess the impact of overhead costs. When overhead costs consume a significant portion of the budget, it is necessary to reconsider the approach to spending and think about what can be done to reduce them. If there are no obvious solutions and all expenses are necessary, it may be necessary to increase the cost of services or goods to increase profits.

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