Legal Definitions - overhead

Overhead refers to the ongoing expenses a business incurs that are necessary for its general operation but cannot be directly linked or attributed to the production of a specific product or the delivery of a particular service. These are the foundational costs that keep the business running, regardless of how much it produces or sells.

• Example 1: A Software Development Company

  Imagine a software development company that creates various applications for different clients. The annual subscription fee for the company's enterprise-level accounting software, which is used to manage all financial transactions across all projects and departments, would be considered an overhead cost. While crucial for the business's financial health, this expense cannot be directly assigned to the development of a single app or billed to a specific client. It's a general administrative cost that supports the entire company's operations.

• Example 2: A Manufacturing Plant

  Consider a factory that produces multiple types of electronic components. The salaries paid to the security guards who monitor the entire facility 24/7, or the cost of the general building maintenance and cleaning services for the factory floor and offices, are examples of overhead. These expenses are essential for the safe and efficient operation of the entire plant but are not directly tied to the cost of manufacturing a single circuit board or a specific batch of components. They are general operating costs that benefit all production activities.

• Example 3: A Consulting Firm

  A management consulting firm provides strategic advice to various corporate clients. The cost of the firm's professional liability insurance, which covers all consultants and projects against potential claims, is an overhead expense. This insurance is vital for the firm's overall protection and credibility, but its premium cannot be directly allocated to a specific client engagement or a particular consulting project. It's a general business expense that safeguards the firm's entire practice.