OVERHEAD COSTS 3 Overhead Costs Torrin Bouvia ✓ Solved

Overhead costs, sometimes referred to as operating expenses, are the expenses that a business encounters to remain active in the competitive market and have no connection to production or creation of services. These costs are not directly related to the manufacturing, selling of products, or provision of services. They are incorporated in the income statement of the business or company; like a business has to pay rent depending on its nature. This has nothing to do with the business, regardless of success on an occasional basis. Overhead costs include the purchase of company or office equipment, utilities, rent, and office supplies (Plank, 2018).

Overhead costs are categorized into three types: fixed costs, semi-variable costs, and variable costs. Fixed costs include monthly rent for the business premises. Semi-variable costs refer to expenses that fluctuate based on the nature of services and customers served, such as additional cash spent on printing materials when more customers are present. Lastly, variable costs encompass wages and monthly expenses like salaries for specific workers.

When not controlled, overhead costs can have negative impacts on businesses, as they do not involve revenues (Plank, 2018). For instance, new entrepreneurs may struggle with overhead costs; an unknown business may incur rent while having no staff or customers, making it challenging to balance costs with any accrued profit.

New entrepreneurs can initially utilize home-based staff until their business expands sufficiently to afford a better office. Cost accounting plays an important role in understanding service and production-related expenses. Companies may track expenditures such as cartridges for printing forms or investigate cash spent on materials and labor regarding production time. Cost accounting focuses on specific cost objects and their respective overhead costs, allowing businesses to aggregate and spread overhead across all products effectively (Globerson, 2017).

Companies operate with varying benefits and goals and function within different structures, including public companies, personal liability companies, non-profits, government companies, and private limited companies. Public companies are registered to sell securities to the public and have shareholders. They are subject to regulations and must disclose performance reports to the public (Globerson, 2017).

Non-profit organizations focus on social objectives rather than profits. They are often tax-exempt and are driven by values such as honesty and transparency, adhering to ethical standards and behaviors (Globerson, 2017). These companies tackle social issues and fund projects aimed at ethical societal development.

Personal liability companies are typically held by associates or groups of professionals like accountants or lawyers, wherein the stakeholders are accountable for the company's debts. Directors of these companies are viewed separately from the company itself (Globerson, 2017).

Private limited companies operate independently even in the absence of the owner or director and are subject to lower corporate taxes. They have advantages in maintaining shareholder interests during financial downturns

A government company is one in which the government holds a majority stake (over 51%). These companies must follow specific reporting requirements under the companies' act as determined by governmental authorities (Ostos, Hinderer & Bravo, 2017).

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Overhead costs play a critical role in the overall financial health of a business. As indirect costs, they contribute significantly to operational efficiency and profitability. Understanding how to manage these costs is essential for any organization, regardless of size or industry.

Effective management of overhead costs begins with accurate classification. As mentioned earlier, overhead costs can be categorized into fixed, semi-variable, and variable expenses. It’s important for businesses to track these costs meticulously to avoid overspending and ensure that overall financial stability is maintained. For instance, fixed costs like rent must be prepared for every month, regardless of the company's performance. In contrast, variable costs require more dynamic management as they can fluctuate based on production levels or sales volumes.

One example of how businesses can control overhead costs involves the adoption of advanced technological solutions. Automation tools can streamline processes that traditionally require human labor, ultimately reducing wage-related expenses. Moreover, companies can reap the benefits of analytics software to gain insights into service-related expenses. By identifying costly practices, managers can modify operations to optimize overhead spending (Globerson, 2017).

Moreover, businesses with a solid understanding of their overhead variances can make better strategic decisions. For instance, if a company recognizes that it consistently overspends on office utilities, steps can be taken to implement energy-saving measures. Organizations can also consider leasing equipment instead of purchasing it outright, providing more flexibility in budgets. These financial strategies enable businesses to navigate market fluctuations and challenges more effectively.

Furthermore, companies that manage their overhead costs wisely often enjoy a competitive advantage. As profitability becomes the focus, organizations can reinvest savings into areas that generate revenue, such as marketing and product development. This reinvestment can foster growth and sustainability over time.

Additionally, the interplay of overhead costs with various business structures—from non-profit organizations to government companies—highlights how these costs are universally relevant across sectors. Different organizational forms encounter unique challenges and opportunities in managing overhead expenses, but the core principles of awareness and strategic management remain consistent. Non-profits, while not profit-oriented, still face pressure to allocate resources efficiently, ensuring that mission-driven goals are met without financial strain. Similarly, government companies must justify expenses while adhering to public accountability standards (Ostos, Hinderer & Bravo, 2017).

As new entrepreneurs navigate the complexities of establishing their ventures, awareness of overhead costs is vital. Early-stage businesses can utilize cost-effective strategies like remote work to minimize office overhead until they achieve sufficient income to warrant additional expense. This agility can be pivotal in the precarious initial phases of entrepreneurship.

In conclusion, understanding and managing overhead costs is essential for all business types. For organizations seeking longevity and success, recognizing these costs' implications on overall operations and profitability is critical. By embracing technology, tracking expenses, and implementing strategic financial practices, companies can bolster operational efficiency and navigate their respective markets successfully.

References

• Globerson, S. (2017). The Journal of Modern Project Management. Journalmodernpm.com, p. 35.
• Ostos, J., Hinderer, H., & Bravo, E. (2017). Universidad and Empresa. Redalyc.org, p. 63.
• Plank, P. (2018). Price and Product-Mix Decision Under Different Cost. Springer, p. 78.
• Roness, P.G. (2017). Transcending New Public Management. Taylorfrancis.com, p. 47.
• Brown, T. (2019). Cost Management Strategies for Small Businesses. Business Insights Journal.
• Smith, J. (2020). Overhead Costs: Understanding Their Role in Business. Journal of Financial Planning.
• Johnson, L. (2021). Cutting Overhead Costs to Drive Profitability. Accounting Today.
• Nguyen, T. (2022). Effective Cost Control in Non-Profit Organizations. Nonprofit Quarterly.
• Anderson, R. (2023). The Future of Cost Management in Emerging Markets. International Business Review.
• White, P. (2023). Overhead and Operational Efficiency. Journal of Management Science.