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Overhead (business)

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Overhead (business)

Overheads and direct costs, when combined, equals total expenses endured by a business.

In business, overhead or overhead expense refers to an ongoing expense of operating a business; it is also known as an "operating expense". Overheads are the expenditure which cannot be conveniently traced to or identified with any particular cost unit. Therefore, overheads cannot be immediately associated with the products or services being offered, thus do not directly generate profits.[1] However, overheads are still vital to business operations as they provide critical support for the business to carry out profit making activities.[2] For example, overhead costs such as the rent for a factory allows workers to manufacture products which can then be sold for a profit. Such expenses are incurred for output generally and not for particular work order e.g., wages paid to watch and ward staff, heating and lighting expenses of factory etc. Overheads are also very important cost element along with direct materials and direct labor.[2]

Overheads are often related to accounting concepts such as fixed costs and indirect costs.

Overhead expenses are all costs on the income statement except for direct labour, direct materials, and direct expenses. Overhead expenses include accounting fees, advertising, insurance, interest, legal fees, labor burden, rent, repairs, supplies, taxes, telephone bills, travel expenditures, and utilities.[3]

There are essentially two types of business overheads. Administrative overheads and manufacturing overheads.[4]

Contents

  • Administrative Overheads 1
    • Examples of Administrative Overheads 1.1
      • Employee Salaries 1.1.1
      • Office Equipments and Supplies 1.1.2
      • External Legal and Audit Fees 1.1.3
      • Company Cars 1.1.4
      • Travel and Entertainment Costs 1.1.5
  • Manufacturing Overheads 2
    • Examples of Manufacturing Overheads 2.1
      • Employee Salaries 2.1.1
      • Depreciation of Assets and Equipments 2.1.2
      • Property Taxes on Production Facilities 2.1.3
      • Rent of Factory Building 2.1.4
      • Utilities for Factory 2.1.5
  • Application of Business Overheads 3
    • Break-Even Analysis 3.1
    • Shut-Down Graph 3.2
    • Balance Sheet 3.3
  • References 4
  • See also 5

Administrative Overheads

Administrative overheads include items such as utilities, strategic planning, and various supporting functions. These costs are treated as overheads due to the fact that they aren't directly related to any particular function of the organization nor does it directly result in generating any profits. Instead, these costs simply take on the role of supporting all of the business' other functions.[5]

Examples of Administrative Overheads

Employee Salaries

This includes mainly monthly and annual salaries that are agreed upon. They are considered overheads as these costs must be payed regardless of sales and profits of the company. In addition, salary defers from wage as salary is not affected by working hours and time, therefore will remain constant.[6] In particular, this would more commonly apply to more senior staff members as they are typically signed to longer tenure contracts, meaning that their salaries are more commonly predetermined.[7]

Office Equipments and Supplies

This includes office equipments such as printer, fax machine, computers, refrigerator, etc. They are equipments that do not directly result in sales and profits as they are only used for supporting functions that they can provide to business operations.[8] However, equipments can vary between administrative overheads and manufacturing overheads based on the purpose of which they are using the equipments. For example, for a printing company a printer would be considered a manufacturing overhead.[9]

External Legal and Audit Fees

A Google Company Car

This includes the cost of hiring external law and audit firms on behalf of the company. This would not apply if company has own internal lawyers and audit plans. Due to regulations and necessary annual audits to ensure a satisfactory work place environment, these costs often cannot be avoided. Also, since these costs do not necessarily contribute directly to sales, they are considered as indirect overheads. Although in most cases necessary, these costs can sometimes be avoided and reduced.[10]

Company Cars

Many companies provide usage of company cars as a perk for their employees. Since these cars do not contribute directly to sales and profits, they are considered an overhead. Similar company perks that are a one-off or constant payment such as partner contract fees with a gym will also fall under administrative overheads.[11]

Travel and Entertainment Costs

This will include company-paid business travels and arrangements. As well as refreshments, meals, and entertainment fees during company gatherings. Although one might argue that these costs motivate workers to become more productive and efficient, the majority of economists agree that these costs are not direct contributes to sales and profits, therefore shall be categorized as an administrative overhead.[12] Despite these costs occurring periodically and sometimes without prior preparation, they are usually one-off payments and are expected to be within the company's budget for travel and entertainment.[13]

Manufacturing Overheads

Manufacturing overheads are all costs endured by a business that is within the physical platform in which the product or service is created. Difference between manufacturing overheads and administrative overheads is that manufacturing overheads are categorized within a factory or office in which the sale takes place[14]. Whilst administrative overheads is typically categorized within some sort of back-office or supporting office. Although there are cases when the two physical buildings may overlap, it is the usage of the overheads that separates them.[15]

Examples of Manufacturing Overheads

Employee Salaries

Although the general concept is identical to the example under administrative overheads, the key difference is the role of the employee. In the case of manufacturing overheads, employees would have roles such as maintenance personnel, manufacturing managers, materials management staff, and quality control staff. It would also include the set wages for janitorial staff members. Once again, the key difference lies in the nature of their respective jobs and the physical location in which their jobs are carried out.[16]

Depreciation of Assets and Equipments

This refers to the reduction in value of equipments as it becomes older and more obsolete. For example, if a printer has a potential useful life span of 5 years, the amount that it can be sold for will decrease each year.[17] Therefore this value in depreciation is calculated as a manufacturing overhead. Moreover, this also applies to vehicles as they tend to depreciate in value significantly after the first year. When calculating manufacturing overheads, accountants mainly use two methods: straight-line method and declining balance method.[18]

Property Taxes on Production Facilities

Every single property unless government owned is subject to some form of property tax.[19] Therefore the taxes on production factories are categorized as manufacturing overheads as they are costs which cannot be avoided nor cancelled. In addition, property taxes do not change in relation to the business's profits or sales and will likely remain the same unless a change by the government administration.[20]

The rent for factory buildings is considered a manufacturing overhead

Rent of Factory Building

Unless the business decides to purchase land and build its own factory, it will be subject to some sort of rent due to the amount of capital required to build a privately owned factory. Therefore this rent must be paid to the land lord on a regular basis regardless of the performance of the business. Although the rent for the building provides the physical platform for the company to produce its products and services, it is not a direct contributor.[21]

Utilities for Factory

This would vary depending on how the utility bill is structured. In the case of it being an overhead, the utility bill is pre-negotiated meaning that the monthly utility bill will be the same regardless of the amount in which the factory actually consumes.[22] This will only be relevant in various countries where there is an option for standardized utility bills. However, due to the vast consumption of electricity, gas, and water in most factories, most companies tend to not have standardized utility bills as it tends to be more expensive.[23] Standardized utility bills are also often times discouraged by governments as it leads to wastage of resources and negative externalities of production.[24]

Application of Business Overheads

For most businesses, business overheads are calculated by accountants for budgeting purposes but also often so the business has an idea of how much they must charge consumers in order to make a profit. The following are common accounting tools which take account of business overheads. [25]

A standard break-even analysis chart

Break-Even Analysis

The break-even analysis determines the point which the business's revenue is equivalent to the costs required to receive that revenue. It first calculates a margin of safety (the point which the revenue exceeds the break-even point) as that is the "safe" amount which the revenue can fall whilst still remaining to be above the break-even point.[26] The graph on the right shows a typical break-even chart. Contribution refers to sales of the product or service, it can also be interpreted as the business's revenue stream. Fixed costs in this case serves the same purpose as business overheads, it will simply be shown as a straight horizontal line on the graph as shown.[27]

Shut-Down Graph

In economics, revenue curves are often illustrated to show whether or not a business should stay in business, or shut down. In theory, if a business is able cover business overheads but unable to cover variable operational costs in the short run, the business should remain in business. On the other hand, if the business is not even able to cover business overheads let alone variable costs, it should shut down.[28] Although this rule largely defers depending on the size of the business, the business's cash-flow, and the competitive nature of the business, it serves as a model rule for most small competitive businesses to operate on.[29]

Balance Sheet

Balance sheet is a financial statement which outlines a company's financial assets, liabilities, and shareholder's equity at a specific time. Both assets and liabilities are separated into two categories depending on their time frame; current and long-term. Business overheads in particular fall under current liabilities as they are costs in which the company must pay for on a relatively short-term/immediate basis. Although balance sheet by itself do not offer much information, it is a useful piece of financial information when combined with other documents such as the income statement or ratio analysis as it offers a diverse and well-rounded description of the company's financial position. [30]

References


-- Module:Hatnote -- -- -- -- This module produces hatnote links and links to related articles. It -- -- implements the and meta-templates and includes -- -- helper functions for other Lua hatnote modules. --


local libraryUtil = require('libraryUtil') local checkType = libraryUtil.checkType local mArguments -- lazily initialise Module:Arguments local yesno -- lazily initialise Module:Yesno

local p = {}


-- Helper functions


local function getArgs(frame) -- Fetches the arguments from the parent frame. Whitespace is trimmed and -- blanks are removed. mArguments = require('Module:Arguments') return mArguments.getArgs(frame, {parentOnly = true}) end

local function removeInitialColon(s) -- Removes the initial colon from a string, if present. return s:match('^:?(.*)') end

function p.findNamespaceId(link, removeColon) -- Finds the namespace id (namespace number) of a link or a pagename. This -- function will not work if the link is enclosed in double brackets. Colons -- are trimmed from the start of the link by default. To skip colon -- trimming, set the removeColon parameter to true. checkType('findNamespaceId', 1, link, 'string') checkType('findNamespaceId', 2, removeColon, 'boolean', true) if removeColon ~= false then link = removeInitialColon(link) end local namespace = link:match('^(.-):') if namespace then local nsTable = mw.site.namespaces[namespace] if nsTable then return nsTable.id end end return 0 end

function p.formatPages(...) -- Formats a list of pages using formatLink and returns it as an array. Nil -- values are not allowed. local pages = {...} local ret = {} for i, page in ipairs(pages) do ret[i] = p._formatLink(page) end return ret end

function p.formatPageTables(...) -- Takes a list of page/display tables and returns it as a list of -- formatted links. Nil values are not allowed. local pages = {...} local links = {} for i, t in ipairs(pages) do checkType('formatPageTables', i, t, 'table') local link = t[1] local display = t[2] links[i] = p._formatLink(link, display) end return links end

function p.makeWikitextError(msg, helpLink, addTrackingCategory) -- Formats an error message to be returned to wikitext. If -- addTrackingCategory is not false after being returned from -- Module:Yesno, and if we are not on a talk page, a tracking category -- is added. checkType('makeWikitextError', 1, msg, 'string') checkType('makeWikitextError', 2, helpLink, 'string', true) yesno = require('Module:Yesno') local title = mw.title.getCurrentTitle() -- Make the help link text. local helpText if helpLink then helpText = ' (help)' else helpText = end -- Make the category text. local category if not title.isTalkPage and yesno(addTrackingCategory) ~= false then category = 'Hatnote templates with errors' category = string.format( '%s:%s', mw.site.namespaces[14].name, category ) else category = end return string.format( '%s', msg, helpText, category ) end


-- Format link -- -- Makes a wikilink from the given link and display values. Links are escaped -- with colons if necessary, and links to sections are detected and displayed -- with " § " as a separator rather than the standard MediaWiki "#". Used in -- the template.


function p.formatLink(frame) local args = getArgs(frame) local link = args[1] local display = args[2] if not link then return p.makeWikitextError( 'no link specified', 'Template:Format hatnote link#Errors', args.category ) end return p._formatLink(link, display) end

function p._formatLink(link, display) -- Find whether we need to use the colon trick or not. We need to use the -- colon trick for categories and files, as otherwise category links -- categorise the page and file links display the file. checkType('_formatLink', 1, link, 'string') checkType('_formatLink', 2, display, 'string', true) link = removeInitialColon(link) local namespace = p.findNamespaceId(link, false) local colon if namespace == 6 or namespace == 14 then colon = ':' else colon = end -- Find whether a faux display value has been added with the | magic -- word. if not display then local prePipe, postPipe = link:match('^(.-)|(.*)$') link = prePipe or link display = postPipe end -- Find the display value. if not display then local page, section = link:match('^(.-)#(.*)$') if page then display = page .. ' § ' .. section end end -- Assemble the link. if display then return string.format('%s', colon, link, display) else return string.format('%s%s', colon, link) end end


-- Hatnote -- -- Produces standard hatnote text. Implements the template.


function p.hatnote(frame) local args = getArgs(frame) local s = args[1] local options = {} if not s then return p.makeWikitextError( 'no text specified', 'Template:Hatnote#Errors', args.category ) end options.extraclasses = args.extraclasses options.selfref = args.selfref return p._hatnote(s, options) end

function p._hatnote(s, options) checkType('_hatnote', 1, s, 'string') checkType('_hatnote', 2, options, 'table', true) local classes = {'hatnote'} local extraclasses = options.extraclasses local selfref = options.selfref if type(extraclasses) == 'string' then classes[#classes + 1] = extraclasses end if selfref then classes[#classes + 1] = 'selfref' end return string.format( '
%s
', table.concat(classes, ' '), s )

end

return p-------------------------------------------------------------------------------- -- Module:Hatnote -- -- -- -- This module produces hatnote links and links to related articles. It -- -- implements the and meta-templates and includes -- -- helper functions for other Lua hatnote modules. --


local libraryUtil = require('libraryUtil') local checkType = libraryUtil.checkType local mArguments -- lazily initialise Module:Arguments local yesno -- lazily initialise Module:Yesno

local p = {}


-- Helper functions


local function getArgs(frame) -- Fetches the arguments from the parent frame. Whitespace is trimmed and -- blanks are removed. mArguments = require('Module:Arguments') return mArguments.getArgs(frame, {parentOnly = true}) end

local function removeInitialColon(s) -- Removes the initial colon from a string, if present. return s:match('^:?(.*)') end

function p.findNamespaceId(link, removeColon) -- Finds the namespace id (namespace number) of a link or a pagename. This -- function will not work if the link is enclosed in double brackets. Colons -- are trimmed from the start of the link by default. To skip colon -- trimming, set the removeColon parameter to true. checkType('findNamespaceId', 1, link, 'string') checkType('findNamespaceId', 2, removeColon, 'boolean', true) if removeColon ~= false then link = removeInitialColon(link) end local namespace = link:match('^(.-):') if namespace then local nsTable = mw.site.namespaces[namespace] if nsTable then return nsTable.id end end return 0 end

function p.formatPages(...) -- Formats a list of pages using formatLink and returns it as an array. Nil -- values are not allowed. local pages = {...} local ret = {} for i, page in ipairs(pages) do ret[i] = p._formatLink(page) end return ret end

function p.formatPageTables(...) -- Takes a list of page/display tables and returns it as a list of -- formatted links. Nil values are not allowed. local pages = {...} local links = {} for i, t in ipairs(pages) do checkType('formatPageTables', i, t, 'table') local link = t[1] local display = t[2] links[i] = p._formatLink(link, display) end return links end

function p.makeWikitextError(msg, helpLink, addTrackingCategory) -- Formats an error message to be returned to wikitext. If -- addTrackingCategory is not false after being returned from -- Module:Yesno, and if we are not on a talk page, a tracking category -- is added. checkType('makeWikitextError', 1, msg, 'string') checkType('makeWikitextError', 2, helpLink, 'string', true) yesno = require('Module:Yesno') local title = mw.title.getCurrentTitle() -- Make the help link text. local helpText if helpLink then helpText = ' (help)' else helpText = end -- Make the category text. local category if not title.isTalkPage and yesno(addTrackingCategory) ~= false then category = 'Hatnote templates with errors' category = string.format( '%s:%s', mw.site.namespaces[14].name, category ) else category = end return string.format( '%s', msg, helpText, category ) end


-- Format link -- -- Makes a wikilink from the given link and display values. Links are escaped -- with colons if necessary, and links to sections are detected and displayed -- with " § " as a separator rather than the standard MediaWiki "#". Used in -- the template.


function p.formatLink(frame) local args = getArgs(frame) local link = args[1] local display = args[2] if not link then return p.makeWikitextError( 'no link specified', 'Template:Format hatnote link#Errors', args.category ) end return p._formatLink(link, display) end

function p._formatLink(link, display) -- Find whether we need to use the colon trick or not. We need to use the -- colon trick for categories and files, as otherwise category links -- categorise the page and file links display the file. checkType('_formatLink', 1, link, 'string') checkType('_formatLink', 2, display, 'string', true) link = removeInitialColon(link) local namespace = p.findNamespaceId(link, false) local colon if namespace == 6 or namespace == 14 then colon = ':' else colon = end -- Find whether a faux display value has been added with the | magic -- word. if not display then local prePipe, postPipe = link:match('^(.-)|(.*)$') link = prePipe or link display = postPipe end -- Find the display value. if not display then local page, section = link:match('^(.-)#(.*)$') if page then display = page .. ' § ' .. section end end -- Assemble the link. if display then return string.format('%s', colon, link, display) else return string.format('%s%s', colon, link) end end


-- Hatnote -- -- Produces standard hatnote text. Implements the template.


function p.hatnote(frame) local args = getArgs(frame) local s = args[1] local options = {} if not s then return p.makeWikitextError( 'no text specified', 'Template:Hatnote#Errors', args.category ) end options.extraclasses = args.extraclasses options.selfref = args.selfref return p._hatnote(s, options) end

function p._hatnote(s, options) checkType('_hatnote', 1, s, 'string') checkType('_hatnote', 2, options, 'table', true) local classes = {'hatnote'} local extraclasses = options.extraclasses local selfref = options.selfref if type(extraclasses) == 'string' then classes[#classes + 1] = extraclasses end if selfref then classes[#classes + 1] = 'selfref' end return string.format( '
%s
', table.concat(classes, ' '), s )

end

return p
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See also

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