What Is Corporate Overhead?
Corporate overhead refers to the indirect costs associated with running a business. In other words, corporate overhead encompasses all the costs that are not directly factored into producing a product or service. Common examples include administrative and marketing expenses. To break things down even more, all corporate overhead costs can be further categorized as either fixed or variable expenses.
Corporate overhead refers to all costs not associated with the the production of a product or service.
One of two main categories of corporate overhead includes fixed expenses. Fixed expenses are those that are not contingent upon how a business performs during any particular period. In other words, fixed expenses remain the same whether a business sells a thousand or a million products.
Common fixed expenses include rent or mortgage payments, asset depreciation, insurance policies, payroll and legal fees. Usually, the only time fixed expenses change are when events contract issuances such as a lease being renewed takes place, and even then the changes are marginal.
Variable expenses are those that fluctuate on a monthly basis and are often directly affected by sales. For example, a business may temporarily increase its advertising expenses while promoting the launch of a new product.
Other common variable expenses include telecommunications costs, office supplies, packaging materials, mailing fees and printing costs. It is not unreasonable to expect all of these variable expenses to increase as the company sells more products and decrease when it sells fewer.
When it comes to calculating company overheads, businesses have several options available to them. The best route for any particular business will depend on the type of business and how it is set up.
For example, a small business with only one location may want to lump all its overhead costs together and divide them by the number of products sold so the overhead costs can be rolled into the costs per unit sold. However, a larger business with multiple departments or several different locations may instead choose to divide up its corporate overhead and allocate it based on each department's or location's productivity.
A vital component to the success of all businesses is to try to keep corporate overhead costs down. One way of doing this is to enact expense allocation methods and streamline the business as much as possible. For example, some businesses may not require a physical location and can be handled in a home office. By not having the additional rent and utilities associated with running a separate office, the business could greatly reduce its corporate overhead.
Other ways of reducing company overheads include implementing energy savings plans, hiring cheaper labor and taking on some interns to handle some of the work at a fraction of the cost of a regular employee.