Question

Perhaps knowing more about overhead costs in general might be information you need your account associates to know and understand.

Answer 1

Overhead cost - Overhead cost are the indirect cost, which are not related to specific business activities that generates money. These are necessary business expenses which you can not get rid of but you can reduce them. You must pay overhead costs, no matter even if your business is slow.

There are three types of overhead cost -

Fixed, Variable, Semi-Variable

1. Fixed overhead cost - As the name suggest these are the fixed cost in every month, these do not fluctuate with business activity. Such insurance expenses, property taxes, assets depreciation etc.

2. Variable overhead cost - These costs are affected by business activities, when there is increase in business activity overhead cost will also increase and vice-versa. For example material used for production, maintenance charges, advertising etc.

3. Semi-variable overhead cost - These cost might have a base rate that you must always pay and a variable rate determined by a usage. It includes some utilities, vehicle usage, hourly wages for overtime etc.

Understanding your overhead cost can help you set prices that results in profit.