Scroll Top

search-icon
    drop-arrow

    Overhead

    Introduction

    Overhead refers to a business expense which remains fixed in nature. Overheads do not increase or decrease with an increase or decrease in the production or manufacturing of goods or provision of services.

    It is important to determine the overhead costs while drawing up the budget of an organisation. Inclusion of overhead helps determine the actual cost of production of the products.

    Understanding Overhead

    The expenses incurred on overheads are ongoing in nature but do not include the costs directly associated with the production of a product. Some times, the overhead costs may be variable or fixed or semi-variable in nature.

    Overheads are essential to keep the factory place, maintain the security of the premises, salaries for the administrative staff and other administration expenses.

    Overhead costs are reported separately in costing statements to do a costing analysis. Costing statements help understand the contribution of various costs to the production cost of a product.

    While arriving at the profit or loss of an organisation, overhead costs are included in the general or specific expense heads, such as building rent, insurance expense on the building, machinery, staff, etc.

    The quantum of overhead expenses affects the profits of a business. The income or profits are determined after reducing the fixed and variable costs of a business.

    The organisation’s turnover, also known as topline, should be reduced by production, administrative and marketing overheads and other variable costs such as selling and distribution costs, to arrive at the profit or loss.

    An organisation may allocate overheads to different products or different departments based on the consumption or use by each department. The ratio may be in a number of production hours or the number of units.

    Certain overheads may be semi-variable which consist of a base cost and incremental costs for incremental usage. Semi-variable overheads are also allocated based on consumption or use.

    Conclusion

    In a general sense, overheads are the management and administrative expenses incurred such as the human resources department for hiring and managing labour policies, building security and housekeeping, facility maintenance, rent, among others.

    In marketing and distribution, overheads may include fixed costs of advertisements in print and electronic media, deposits for the display of products at retail outlets and so on. Overhead costs need to be identified and allocated to arrive at the profit or loss of the business.

    Index

    Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

    Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

    CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

    Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

    Cleartax is a product by Defmacro Software Pvt. Ltd.

    Company PolicyTerms of use

    ISO

    ISO 27001

    Data Center

    SSL

    SSL Certified Site

    128-bit encryption