Overhead refers to the overall cost or resources that a company uses in order to complete a process. These resources and the associated costs, however, are not directly responsible for the creation of the end product. Another qualification of overhead costs also are not associated directly with a specific unit of output.
Take raw materials (resources) or the wages of employees. These resources and/or costs contribute directly to the production of the product or service that the company offers. Hence, they are not considered under overhead.
On the other hand, costs like administrative costs, insurance payments, rent payments, and even utility costs are necessary for the efficient operation of the business. However, these expenses do not contribute directly to the production of the goods or services that the company offers. They fall under overhead.
Another term used in lieu of overhead is burden cost. Perhaps a more familiar term is operating cost. This could be easier to understand due to the fact that overhead, or operating cost, is essential for the business to operate on a daily basis.
It is vital that a business be able to have cash handy to meet overhead costs. Otherwise, it will not be able to make a steady profit.