In a company that produces goods -- usually referred to as a manufacturing company -- there are two types of expenses. Those which are not associated with the production of the goods that the business will eventually sell are called indirect costs. These are what are known as overhead expenses. Although they are not directly related to producing the goods that are the source of revenue for the company, they are still necessary in order to continue production and producing income.
Direct costs are not considered overhead expenses. These are the costs that the company incurs for materials and labor that go directly into the products that the business produces. For example, the person that screws the bolts onto the widgets for Widget, Inc., is a direct labor expense. However, the repairman from Fix It, Inc., that repairs the broken air conditioner in the warehouse is not a direct expense. Direct labor and direct materials are the two primary types of direct costs.
Indirect expenses, or manufacturing overhead, include indirect labor and indirect materials. Expenses related to any materials or labor that cannot be allocated to a specific good or set of goods is an indirect expense. Examples of manufacturing overhead include: utility expenses, property taxes, repairmen, warehouse cleaning crew, equipment and product inspectors, forklift operators, computer and communication systems for warehouse, safety costs, depreciation and insurance.
Other Types of Overhead
There are other types of overhead related to the sale of goods and general office expenses. These types of overhead include selling and administrative overhead. Selling expenses, advertising, utility expenses and communication expenses for the office, packaging and shipping, office supplies, management expense and the costs of administrative personnel are all included in these types of overhead costs.
Type of Expense
Overhead expenses can fall into one of three categories: fixed, variable or mixed cost. Fixed costs do not change in accordance with the amount of goods that the company produces. Variable costs, on the other hand, are directly correlated to the amount of goods produced. For example, although the product inspector is an indirect labor expense, if the number of goods that the company produces dramatically increases, his hours are going to increase in direct correlation. His wages are a variable expense. A mixed cost is one that only partially fluctuates with the production of goods.