what is an overhead cost

An overhead cost is an ongoing business expense that is not directly tied to a specific product, service, or job. In simple terms, it’s the cost of keeping the business running in the background, such as rent, utilities, insurance, office supplies, or admin salaries.

Quick scoop

Overhead costs are usually called indirect costs because you can’t trace them to one single item you sell. For example, if a bakery pays monthly rent and electricity, those bills support all the cakes and breads it makes, rather than just one loaf.

Common examples

• Rent for office or shop space.

• Utilities like electricity, internet, and water.

• Insurance and accounting fees.

• Salaries for administrative staff.

• Maintenance, office supplies, and software subscriptions.

Why it matters

Businesses track overhead to understand their true cost of running operations and to set prices properly. If overhead is too high, profit margins can shrink even when sales are strong.

Simple distinction

• Direct cost: tied to one product or service, like materials used to make a chair.

• Overhead cost: supports the whole business, like the factory rent where many chairs are made.

Bottom line

Overhead cost means the general running cost of a business, not the cost of making one specific item.