What does overhead refer to in a business context?

In a business context, overhead refers to costs that are not directly tied to the production of goods or services but are essential for the overall operation of the business. These costs can include rent, utilities, insurance, salaries of non-production staff, and other administrative expenses that are necessary to keep the business running. Since overhead costs support the business as a whole rather than a specific product or service, they must be accounted for to accurately assess profitability and financial health.

This understanding distinguishes overhead from direct costs, which relate specifically to the actual production process, such as raw materials and labor used in manufacturing. Since overhead encompasses a broad array of costs that do not directly generate products or revenue on their own, it is crucial for budgeting and financial planning. Recognizing the role of overhead helps organizations maintain balance in cost management strategies, ensuring they allocate sufficient resources to sustain operations while pursuing growth.