Why is Overhead Cost Important?
1. An understanding of the overhead costs makes it easier to evaluate how much a company’s product or service must cost to achieve adequate profits.
2. Overhead is often a broad expenditure, which means it affects the entire company’s activities.
3. It is often amassed as a lump payment, which may subsequently be assigned to a specific project or department depending on cost drivers. For example, utilizing activity-based costing, a service-based organization might distribute overhead expenditures depending on the activities accomplished within each department, such as printing or office supplies.
4. Overhead costs are essential because they represent the expense of running a firm.
5. Understanding and managing the overheads of a company, particularly how it relates to the companies production, can help management keep the firm successful and maximize the sales margins.
6. Overhead expenses are essential and inevitable. However, if you fail to keep track of your overheads, they can eat away at your earnings and destabilize your firm.