What is overhead cost?

Overhead cost refers to indirect manufacturing expenses that cannot be directly traced to a specific product or cost unit. These costs are incurred to support production but are not part of direct materials or direct labour. Examples include factory rent, depreciation of machinery, indirect labour (e.g., supervisors), factory utilities, and insurance. Overhead costs are allocated to products using predetermined rates (e.g., per machine hour or per direct labour hour) to determine the total cost per unit. Unlike direct costs, overheads are not tied to a single product but are essential for maintaining production operations. Proper allocation ensures accurate product costing and pricing decisions.