Overhead: Definition and Examples

Overhead is the continuing cost of operating a business, not including labor.

Overhead

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Overhead refers to the ongoing expenses that a business must pay aside from labor or costs directly related to labor. Most overhead costs are fixed costs, meaning that these expenses remain constant and do not change depending on business performance. An example of a common fixed overhead cost is rent. Rent is a business expense not related to labor and is ongoing regardless of business performance. Overhead costs don’t necessarily have to be fixed, they can also be semi-variable. A semi-variable cost is a cost that will occur no matter what, but the value will change depending on certain factors. A common example of a semi-variable overhead cost is the cost of electricity. The electric company will charge the business a base (fixed) cost each month, but the amount the business is charged on top of the base depends on the amount of electricity used, making it subject to change, thus semi-variable. Calculating your overhead cost is extremely important – mainly so you can decide how much you need to charge for your product of service in order to turn a profit and build a healthy business.

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