Business glossary
Overhead costs
Business costs that support operations but are not traced directly to one job or product.
Example
A business expects $24,000 of annual overhead and 1,200 billable hours. Allocating overhead by those hours gives $20 per billable hour. A five-hour job is assigned $100 under that method.
How it differs from related terms
Overhead supports the business rather than one directly traced job. Distinguish overhead allocation from direct labor and materials to avoid counting a cost twice. Actual utilization can change the recovery achieved by an hourly allocation.
Frequently asked questions
What is an example of overhead costs?
A business expects $24,000 of annual overhead and 1,200 billable hours. Allocating overhead by those hours gives $20 per billable hour. A five-hour job is assigned $100 under that method.
How should overhead costs be interpreted?
Overhead supports the business rather than one directly traced job. Distinguish overhead allocation from direct labor and materials to avoid counting a cost twice. Actual utilization can change the recovery achieved by an hourly allocation.