What is overhead in cost accounting?

Overhead, also known as indirect costs, refers to the indirect expenses incurred in the production process that cannot be directly traced to specific products, services, or cost objects. Overhead costs represent the expenses necessary to support the production and operation of an organization but do not directly contribute to the creation of individual units of output. Examples of overhead costs include rent, utilities, depreciation, property taxes, insurance premiums, administrative salaries, and maintenance expenses. Overhead costs are incurred for the benefit of multiple cost objects or the organization as a whole and are allocated to cost objects using a reasonable allocation basis or cost driver. Overhead costs are an essential component of the total cost of production and need to be allocated accurately to determine the true cost and profitability of products or services. Effective management of overhead costs is critical for cost control, budgeting, pricing decisions, and overall financial management within an organization.