Types of Overhead Cost
Overhead expenditures can be fixed, meaning they always cost the same amount, or variable, meaning they fluctuate based on the degree of business activity. Overhead expenditures can also be semi-variable, which means that the firm incurs some of the expense regardless, while the remainder is determined by the degree of business activity.
1. Fixed Overhead: Fixed overhead refers to overhead expenditures that stay constant throughout time and do not fluctuate with business activity. Fixed overhead stays constant regardless of whether the firm grows or slows. Rent, depreciation, insurance payments, office worker wages, and license fees are some examples.
2. Variable Overhead: Variable overhead refers to overhead expenditures that change with business activity. These are variable overhead charges. As corporate activity grows, so does variable overhead. As economic activity slows, variable overhead lowers. Examples include office equipment, shipping and mailing charges, marketing, legal fees, and upkeep.
3. Semi-Variable Overhead: Semi-variable overhead is a hybrid of fixed and variable overhead, in which some costs are incurred regardless of company activity but may rise as business activity increases. Semi-variable overhead includes commissions and utility bills. Utilities are charged a base fee, with the balance dependent on use.
4. Other Types: Other types of overhead may be suitable, depending on the business. For example, overhead charges might apply to a wide range of operational areas. General and administrative overhead generally covers expenditures associated with a company’s general management and administration, such as the hiring of accountants, human resources, and receptionists.