The term "overhead" refers to the costs associated with producing a good or service that are essential but are not directly involved in the production process. For instance, you have to maintain machinery in a factory, even though maintenance is not part of the production process. Overhead costs must be accurately assigned to each unit of production, based on a consistent rate if you are to make well-informed choices concerning production planning and product pricing. It's vital to understand how to determine the overhead rate.
It is relatively simple to determine the direct costs involved in producing a good or service. For example, you can measure the amount of raw materials required to manufacture a good. You can determine the direct labor involved by measuring how long it takes workers to provide a service or to make a product.
Advertisement Article continues below this adOverhead costs are components of the production process that are not easily assigned on a per-unit basis. Examples of this include indirect energy expenses, equipment repairs, depreciation, property taxes and the salaries of maintenance workers. These costs are aggregated together as overhead.