What Is Overhead in Accounting?
Definition, examples, and how overhead is absorbed into products.
Home › Accounting Glossary › Overhead
| Opposite of | Direct cost |
|---|---|
| Activity base examples | Direct labour hours, machine hours |
| Topic | Cost accounting · Product costing |
Overhead in plain English
Some costs help produce everything, so they cannot be pinned on a single item. To work out what a product really costs, overhead is shared out, or absorbed, using a sensible measure such as labour hours.
Worked example
Budgeted factory overhead is 60,000 and budgeted direct labour hours are 20,000.
Absorption rate = 60,000 ÷ 20,000 = 3 per labour hour.
A job that takes 50 labour hours absorbs 50 × 3 = 150 of overhead.
- Treating overhead as a direct cost of a product.
- Using an activity base that does not reflect what really drives the cost.
Frequently asked questions
What are examples of overhead?
Factory rent, utilities, equipment depreciation, indirect labour and insurance.
What is the difference between overhead and direct costs?
Direct costs can be traced to a product. Overhead cannot be traced directly and is shared across products.
What is under-absorbed overhead?
When the overhead actually incurred is more than the overhead absorbed into production.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.