Variable, fixed, initial… oh my! When it comes to classifying costs, it’s easy for non-accountants to get a little frustrated with technical definitions. Here learn how to differentiate overhead costs from other types and see some typical examples.
If you look at your business like an umbrella, there are certain items you must pay for and expense out each month in order to keep your business running—these are examples of overhead costs.
You may need a fax machine or printer at your business, but your business won’t be shut down if these things are in need of repair or replacement.
Understanding overhead costs can get tricky depending upon the size of your business. For example, in my auto dealership, the variable salaries of my employees throughout various departments are not all overhead costs; however the salary for the office personnel is considered an overhead cost example because it remains consistently the same.
It’s great to have your storefront windows shine every once in a while but if you do it intermittently, it’s not consider an overhead cost. If you allow for this expense monthly, it can be considered an overhead cost.
Even the salary of the owner of the business often is not looked at as an overhead cost because there are times when the owner’s salary changes or he receives none at all.
Types of Overhead Costs
To truly analyze what are the true examples of overhead costs in your business ask yourself this one question: “What must I pay for each month in order to keep my business open?"
Typical overhead expenses (sometimes referred to as fixed costs) include items such as:
- Office Salaries
- Employee Benefits
- Payroll Taxes
- Stationery, Office Supplies & Postage
- Legal and Professional Services
- Outside Services (Performed monthly)
- Company Car Expense
- Dues & Subscriptions
- Data Processing
- Travel & Entertainment
- Rent or Mortgage
- Building Maintenance
- Interest on Loans or Mortgages
- Insurances & Taxes
There are also overhead costs to consider if you have more than one department within your business.
Departmental Overhead Costs
If you have a sales department and perhaps a shipping department, there are other examples of overhead costs to include:
- Department Specific Advertising
- Policy Expense – This is a cost you may incur each month where a mishap occurs and you must eat the cost and should be expensed to the department where the mishap occurred.
Some businesses will include departmental wages as fixed expenses but usually only those salaries or wages that remain the same each pay period with no variation.
Making it Work
Understanding what to classify as an overhead expense is often easy if you utilize some sort of accounting software that includes templates of overhead expenses in a chart of account format.
It’s also important to manage cash flow effectively so you have enough money each month to cover overhead costs.
If you’re new to accounting, take a basic accounting course, some can even be found online or at your local community college, or seek out the help of an accounting professional to help you determine what are examples of overhead costs and which expenses are variable costs that tend to change each month.