Definition of Overhead
Overhead refers to the fixed costs incurred in a company’s regular operations, including expenses such as rent payments, insurance policies, salaries for management personnel, utility bills, and other costs that are not directly related to producing goods or delivering services. These costs are necessary to keep the business running and maintained, regardless of the sales volume or level of production. Overhead expenses are typically considered indirect costs, as they cannot be directly traced to a specific product or service offered by the company. While overhead costs do not contribute directly to revenue generation, they are vital for the overall functioning of the organization. Companies need to manage their overhead expenses effectively to maintain a healthy cash flow and profitability. By measuring overhead expenses against revenue, companies can determine their overhead rate and identify ways to optimize the allocation of resources and reduce unnecessary costs. Effective overhead management is key to ensuring the long-term success and growth of a business.
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