Overhead is an integral part of running any successful business, as it covers many big picture aspects of a business’s operations. Simply put, overhead is the costs of business operations aside from the direct costs associated with creating a product or service. Overhead can be defined in a variety of different ways, but generally spoken, it includes the costs of running a business without the cost of the goods or services the business provides.

Overhead costs are traditionally divided into two categories, fixed and variable. Fixed costs are those expenses that remain the same no matter how much the business produces; examples including rent, taxes, salaries, interests and insurance policies. Variable costs are those which are related to profit and scale; they vary depending on the volume of production and include costs associated with production, including raw materials, labor and equipment (such as machines). There is also a third type of overhead cost, known as a hybrid overhead cost, which contains elements of both fixed and variable costs.

When categorizing overhead, different types of costs can come into play. Administrative overhead generally includes costs related to managing the business, such as bookkeeping, payroll and taxes. Selling overhead pertains to marketing and selling the products or services; this could include advertising or promotional campaigns. Lastly, research and development overhead encompasses costs related to researching and developing new products or services.

When preparing an income statement, overhead costs are typically reported within the operating expenses section. This section is typically made up of depreciation, amortization, inventory and other variables. Overhead costs are only applicable for ongoing businesses; unlike one-time operations the overhead costs need to be accounted for months or even years after the initial operations are completed.

In total, overhead is an important part of any business structure, as it covers many of the costs associated with running a business that are not directly related to the product or service. It is important to ensure that overhead costs are both accurately reported and monitored, to ensure that they are not taking too large a portion of the budget and leaving funds unspent.