Overhead is those administrative expenses of a business that are required to operate general corporate functions, and which cannot be definitively attributed to any revenue-generating activities or units of output (such as products to be sold). Overhead is a necessary part of a business, and must be paid for even when sales levels are low or nonexistent. The cost of overhead can be substantial, which is why managers tend to closely monitor it.
Examples of overhead expenses are as follows:
- Administrative salaries
If overhead can be traced to the factory area, it is designated as factory overhead and is allocated to the units produced in the period in which the overhead cost is incurred. If the overhead is associated with any other part of the business, it is designated as administrative overhead and is charged to expense as incurred; there is no allocation.