In business, what is overheads means a certain expense of working in the company. Overhead expenses are the expenditure that cannot be easily identified or tied-down to any particular cost unit, like labor or raw materials. There are many types of overheads. In one sense, all overheads costs. However, they are not expenses that are only incurred once; rather, they are costs that tend to renew themselves because of the recurring nature of the operations of the organization. Therefore, these costs are called recurring expenses.
These costs can be identified as overhead expenses. It includes the value of services or goods offered by the suppliers or the manufacturers to the dealers or the end users. The amount of money spent by the dealers or the end users to obtain these goods and services will form the cost of what is overheads. Similarly, the amount of money spent by the suppliers or the manufacturers on the production of the same goods and services will form the cost of what is recurring. This definition excludes, however, the income effects of sales, rental, and reinvestment net change.
In addition, what is overheads also includes indirect costs. Indirect costs are costs of doing business. These include the cost of building or opening the store, rent for the location, utilities, and various other items. It is, in fact, this type of cost that leads most companies to adopt a cost-effective over-all approach. By getting discounts on the purchases of their products, the manufacturers and the dealers can bring down the cost of their operations considerably.
A large portion of what is overheads is inventory. The over-all cost of inventory control results from the cost of purchasing the inventories of the dealers, the manufacturer, and the retailers. These costs are only included in the analysis of costs of marketing the particular product. By including the purchase of inventory, these overheads are included in the cost of marketing. The analysis of marketing costs is called the cost of sales analysis.
Another area that must be analyzed in order to determine what is the over-all cost of manufacturing and marketing a given product is the over-all cost of the support activities associated with the marketing activities. These activities include the costs of the various forms of advertising used to sell the product. Examples of these types of activities include the use of television, radio, and print media.
Other activities related to the marketing activities include the costs of distribution. These include the costs of delivering the merchandise to the customer, the cost of the various forms of transportation used, and the cost of the various goods and services provided to the market place. Some distribution activity may include the transportation of raw materials to the market place from the manufacturer’s or dealer’s plant. Other distribution cost may relate to the packing and shipping of the items sold to the end users.
What is overheads does not necessarily have a direct relationship to the value added by the product. However, it is important for the manager to determine the cost of the product as this will affect the company’s profit margins. How much profit margin is gained depends on how well the market place is being represented and advertised to the target market. The quality and cost of marketing materials will affect the profit margin. It is also important to consider the level of competition that an item faces. If the product has a higher level of competition than the cost of marketing will be less.
It is impossible to eliminate what is overheads completely from the manufacturing process. In addition, some overheads are necessary for a competitive advantage. If the market conditions force a company to incur such expenses, they should be allowed to exist so long as they do not unduly restrict production or result in a loss of business. It is important that management analyze the nature of their competition and be aware of any situation where a company faces increased overheads and their ability to compete with other companies.