Overhead is a business cost that can’t be associated directly to the production of a product or service. It’s a necessary expense of operating a business. Overhead expenses include utilities to operate a building, employee salaries, insurance, rent, administration, and taxes.
Overhead expenses show up on the income statement. Overhead expenses must be factored into product costs when setting a price for a product. The difference between the product price and cost is profit. If overhead expenses are left out of a product’s cost, the result will be a smaller profit or even a loss on the product.