Overheads

Overheads refers to those costs that cannot be directly assigned to a cost object (such as a product, product line, or customer).

Overheads refers to this entire group of indirect costs, rather than to individual indirect costs.

Examples of expenses generally included in the overheads category are:

  • Administrative salaries and wages
  • Insurance expenses
  • Legal and accounting expenses
  • Office expenses
  • Rent expenses
  • Telephone expenses
  • Utilities

Overheads can be subdivided into two smaller groups of indirect costs. One group is factory-related indirect costs, which is usually called factory overhead or manufacturing overhead. These overheads are allocated to products that were manufactured during the period when the overheads were incurred. The allocation should use a consistent allocation methodology from period to period.

The other group is administrative indirect costs, which is usually called administrative overhead, and is charged directly to expense in the period incurred.

Similar Terms

Overheads is also known as overhead and indirect costs.