What does the term 'overhead' refer to?

The term 'overhead' refers specifically to indirect costs that are not directly tied to the production of goods or services. These costs are essential for overall operations but cannot be directly traced to any specific cost object, such as a product or project. Examples of overhead include utilities, rent, salaries of administrative staff, and other general administrative expenses that support the production process without being directly involved in it.

Understanding overhead is crucial in cost accounting and management accounting, as it helps businesses accurately allocate costs, set pricing strategies, and evaluate profitability. By distinguishing overhead from direct costs, which are costs that can be directly linked to a specific goods or services, it becomes easier to analyze financial performance and make informed managerial decisions. This clarity aids in budgeting, forecasting, and determining whether pricing strategies are sustainable.