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What is meant by overhead expenses? Explain fixed, variable and semivariable overheads with examples
What is meant by overhead expenses? Explain fixed, variable and semivariable overheads with examples.
Expert Solution
- Over heads are business costs that are related to the day to day running of the business. Unlike operating expenses they cannot be traced to a specific cost unit or business activity. They support the overall revenue generation of the business.
- Fixed overheads are costs, that remain constant every month and donot change with changes in business activity levels.
- One such example of a fixed overhead are rent paid every month. Also, property taxes paid can be fixed too.
- Variable Overheads are expenses that vary with business activity levels. They can increase or decrease with different activity levels of business.
- During high levels of business activities, the expenses will increase, but with reduced business activities, Overheads can be substantially declined or even eliminated.
- Examples of variable overhead expenses include office supplies, advertisement and marketing costs, consultancy service charges, equipment repairs and maintenance.
- Semi variable Overheads are part fixed overhead expenses and part variable overhead costs. Business may incur such cost at any time, even though the exact cost will fluctuate at any time depending on business activity level.
- Semi variable overhead come with the base rate that a company must pay at any activity level plus a variable cost, that is determined by the level of usage.
- Example of such is sales commission, say it is fixed to 2% minimum and can be as high as 6% depending on activity level of company. Here, 2% is fixed overhead component and additional can be variable overhead cost.
- Also, vehicle usage and some utilities like power and water costs have a fixed charge plus an additional cost based on the usage.
- An overall example of overhead cost can be rent. Rent is payable quarterly, monthly, or annually as agreed in the tenant agreement with the landlord. When business is experiencing low sales, it can reduce its cost by negotiating the rental charges or by moving to less expensive premises.
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