Overhead cost

In business, overhead or overhead expense refers to an ongoing expense of operating a business; it is also known as an operating expense. Overheads are the expenditure which cannot be conveniently traced to or identified with any particular cost unit. Therefore, overheads cannot be immediately associated with the products or services being offered, thus do not directly generate profits. However, overheads are still vital to business operations as they provide critical support for the business to carry out profit making activities. For example, overhead costs such as the rent for a factory allows workers to manufacture products which can then be sold for a profit. Such expenses are incurred for output generally and not for particular work order; e.g., wages paid to watch and ward staff, heating and lighting expenses of factory, etc. Overheads are also very important cost element along with direct materials and direct labor.

Overheads are often related to accounting concepts such as fixed costs and indirect costs.

Overhead expenses are all costs on the income statement except for direct labour, direct materials, and direct expenses. Overhead expenses include accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities.

There are essentially two types of business overheads. Administrative overheads and manufacturing overheads.

Administrative overheads include items such as utilities, strategic planning, and various supporting functions. These costs are treated as overheads due to the fact that they aren't directly related to any particular function of the organization nor does it directly result in generating any profits. Instead, these costs simply take on the role of supporting all of the business' other functions.

Universities regularly charge administrative overhead rates on research. In the U.S. the average overhead rate is 52%, which is spent on building operation, administrative salaries and other areas not directly tied to research. Academics have argued against these charges. For example, Benjamin Ginsberg showed how overhead rates are primarily used to subsidize ballooning administrative salaries and building depreciation, neither of which directly benefit research; although it does benefit the administrators that determine university policy in his book The Fall of Faculty. An article written by Joshua Pearce in Science (journal) argued that overhead accounting practices hurt science by removing funds from research and discouraging the use of less-expensive open source hardware. He went into detail on the accounting showing how millions were wasted each year on overhead cash grabs by university administrators in ZME Science.

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