What are overheads?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
Overheads are the costs of running a business as a whole rather than of producing particular goods or services. Rent, insurance, marketing, utilities, software subscriptions and office wages are common examples. They are usually recorded as expenses below gross profit in the profit and loss statement, so they must be covered before there is any net profit.
What makes a cost an overhead is what it relates to. A direct cost can be traced to the goods or services the business sells, such as stock for resale or materials used on a job. An overhead keeps the business running in general and cannot be pinned to any one product, job or sale.
Overheads and fixed costs are easy to mix up, but they are different ways of sorting costs. Direct or overhead is about what a cost relates to; fixed or variable is about whether it changes with the level of activity. Rent may stay the same each month while electricity and cleaning supplies rise and fall with trading, and all three are overheads. Equally, a direct cost can be fixed, such as the salary of a production line worker who is paid the same however much is made.
Because every sale has to help pay for overheads, they shape pricing and planning. A price that covers only the direct cost of a product leaves nothing towards rent, insurance or marketing. Sorting overheads into a few clear accounts, such as premises, insurance, marketing and administration, makes it easier to see which ones are growing.
In Australia
business.gov.au's key financial terms give rent, marketing, utilities and administrative costs as examples of overheads. Its profit and loss statement template lists expenses such as advertising and marketing, rent and rates, utilities and insurance, and describes net profit as the money left once those expenses are paid.
Its pricing guidance says a price worked out from costs should include all relevant costs, naming overheads alongside materials and labour, and suggests reviewing prices at least yearly, and whenever costs change. Its guidance on improving cash flow suggests reviewing costs regularly, dropping those the business can do without, arranging a payment plan for larger costs and comparing energy, banking, supplier and insurance deals.
Utilities appear in business.gov.au's glossary as an example of an overhead and in its budgeting guide as an example of a variable cost.
Worked example
| Overhead | How it behaves | Amount (AUD) |
|---|---|---|
| Rent | Fixed for the lease term | 4,200.00 |
| Insurance | Fixed for the policy year | 310.00 |
| Electricity and gas | Varies with trading hours | 980.00 |
| Cleaning supplies | Varies with trading | 265.00 |
| Software subscriptions | Fixed each month | 390.00 |
| Marketing | Set by the owner each month | 450.00 |
| Total overheads | 6,595.00 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Budgeting every overhead as a flat monthly amount, so a busy month's higher power and cleaning bills come as a surprise.
- Setting prices from direct costs alone, with nothing built in towards rent, insurance and other overheads.
- Watching only the overheads total, rather than which individual costs are growing.
Related terms
Related service
Management and cash-flow reports
Monthly reports that show where the business stands.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Set up a profit and loss statement
business.gov.au, Australian Government. Current at 16 October 2026, released 18 January 2024. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Choose a pricing strategy
business.gov.au, Australian Government. Current at 16 October 2026, released 1 October 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Improve your cash flow
business.gov.au, Australian Government. Current at 16 October 2026, released 20 May 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Create a budget
business.gov.au, Australian Government. Current at 16 October 2026, released 14 November 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.