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What is Direct Overhead?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 07 December 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
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"Direct overhead" is a term that is used to describe any expenses that are directly involved in the production of goods and services for resale to consumers. There are many different types of businesses expenses that fall into this category, including the rent or leasing of operating space for the business, and the raw materials used in the production process. In many nations, even the supplies that are used in the business and sales offices as part of the ongoing operations can be properly classified as direct overhead for both general business accounting and tax purposes.

Other types of business expenses are also considered to be direct overhead. These include any expenses related to the maintenance of the business facility as well as insurance that is secured on the sites operated by the company. Essentially, any type of expense that can be tied directly to the function and upkeep on the facilities used to produce goods and services may be considered part of the direct overhead costs and accounted for accordingly.

The recording of direct overhead in the company’s accounting records is very important. This is because tax laws in many nations require specific details regarding how business expenses are classified. By making sure to properly classify any business expense that is considered direct overhead by the relevant tax agencies, it is possible to utilize the correct tables and calculations to asses taxes and claim any deductions of exemptions that those agencies currently allow.

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Accurately tracking direct overhead is also very important when it comes to understanding the cost of doing business. By classifying the overhead costs properly, it is easier for a company to determine the impact of those expenses on the final cost for each unit of a good that is produced. This in turn makes it easier to identify the rate of return per unit that the company needs to realize in order to cover both overhead and general expenses and still make an equitable amount of profit off each sale.

As part of the accounting process, direct overhead is normally accounted for as part of the inventory cost and will have some impact on the total cost of goods sold. In this manner, the accurate classification of overhead line items will make a difference both in the tax assessments on the goods in process inventory as well as the finished inventory. Doing so means the company has a better chance of taking advantage of every possible exemption or tax break that is currently provided by the tax agency, a measure that can help to increase the amount of profit that the company is able to retain for use in its ongoing operation.

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