Overhead

What Is Overhead?

Overhead is the ongoing cost of running a business that cannot be linked directly to a particular product, service, or project. Typical examples include office rent, utilities, insurance, equipment maintenance, accounting fees, and the salaries of administrative staff. These costs are generally paid whether or not the company produces or sells anything in a given period. By contrast, direct costs such as raw materials or the wages of workers assembling a product can be traced to a specific item.

How Overhead Is Used

Because overhead is shared across the business, companies often allocate it to products, departments, or projects so they can estimate the full cost of each one. A common approach is to choose an allocation base, such as labor hours or machine time, and then divide total overhead by that base:

Overhead Rate = Total Overhead ÷ Allocation Base

For manufacturers, allocated overhead is typically included in cost of goods sold. Overhead that is not tied to production usually appears among operating expenses on the income statement. Analysts often compare overhead to revenue, as part of measuring how much profit a company keeps from its sales through its operating margin.

Why It Matters to Investors

Overhead affects profitability. When a large share of costs is fixed overhead, profits can change sharply as sales rise or fall, because those costs must be covered either way. This effect is known as operating leverage. Comparing overhead across companies in the same industry can offer insight into efficiency, but allocation methods differ, so such comparisons require care.

The word also has a separate meaning in technical analysis, where "overhead supply" or "overhead resistance" refers to shares held by earlier buyers at prices above the current market price. Some traders view these holders as potential sellers if the price recovers to their purchase level.