In the process of operating a business, in addition to direct costs such as raw materials or labor, there is a group of costs that are not easily identified but have a great impact on profits - that is overhead costs, also known as general costs. So what are overhead costs, how many types are there and how to manage them to optimize financial performance? 

In this article, Bizzi will provide clear concepts, classify general costs, and provide practical examples to help businesses and accountants more easily control and allocate costs more reasonably.

1. What is Overhead Cost? Overview of Overhead Cost

Overhead Cost is an important concept in financial management and business accounting. Understanding What is overhead cost? Not only does it help business owners control their budgets well, it also optimizes operating costs, thereby improving profits.

1.1. Definitions and Concepts

What is overhead cost? These are the accounts indirect costs arising in the course of business operations, but cannot be directly attributed to a specific product or service. Unlike raw material costs or direct labor costs, overhead costs play a supporting role to ensure the entire system operates smoothly.

These costs include, but are not limited to:

• Office rent, electricity, water costs
• Equipment and software maintenance costs
• Indirect staff salaries such as managers and administrative staff
• Office supplies, accounting, legal costs

From an accounting perspective, overhead is an indispensable factor when budgeting, calculating product costs and evaluating business performance. Correctly allocating overhead costs helps businesses avoid mispricing products or services, while ensuring financial statements accurately reflect the situation.

1.2. Characteristics of General Costs

Understanding the characteristics of overhead costs helps businesses analyze financial performance and make appropriate cost management decisions.

• Occurs periodically, independent of production or sales: Overhead costs typically come in the form of fixed costs such as office rent, utility bills, equipment maintenance, insurance costs, or administrative salaries. These expenses must be paid regularly even when the business does not have any new orders or production decreases.
• Recognition on financial statements and impact on profits: General expenses are shown in the Income Statement under operating expenses, reducing gross profit and directly affecting net income - an important indicator reflecting business efficiency.
• Must be accounted for accurately to optimize profits: Correctly and completely identifying overhead expenses is an essential step to accurately calculating net profit. Effective overhead cost management helps businesses proactively control their finances, thereby being able to cut costs unnecessary expenses and increase profitability.
• Divided into different types: Depending on their variability, overhead costs can be classified into fixed overhead, variable overhead, and semi-variable overhead. Proper classification will assist businesses in budgeting, cash flow tracking, and cost performance analysis.

2. Types and Examples of Overhead Costs

Overhead costs are expenses that are not directly related to the production of products or provision of services but are still necessary for the business to operate effectively. Understand and classify correctly What is overhead? Helps businesses better control finances, optimize profits and determine accurate prices.

2.1. Classification of General Costs

Depending on the specific characteristics and activities, overhead can be classified as follows:

• Fixed costs (Fixed Overhead): An expense that does not vary with output or activity levels over a given period of time. Examples include rent, depreciation of fixed assets, business insurance, administrative staff salaries, and business license maintenance fees.
• The variable costs (Variable Overhead): Varies with volume of production and business activities. For example: marketing costs, shipping costs, equipment maintenance as needed, legal costs as cases arise.
• Semi-variable Overhead: Combination of fixed and variable components. For example, electricity bill with a minimum fixed rate plus actual usage, employee commission based on sales.
• Cost by function:
  • Business management costs (G&A Overhead): Including administrative salary, accounting, human resources, office supplies costs, outsourcing administrative services.
  • General selling expenses: Includes advertising costs, printing, sales events, CRM software, sales staff commissions.
  • General research and maintenance costs: Occurs in businesses with R&D departments or factories and technical workshops.
  • Manufacturing Overhead (MOC): As an indirect cost in production, it is often underestimated but has a great impact on the price. Including: depreciation of machinery, indirect production personnel wages, factory electricity and water, quality inspection costs, consumables and equipment maintenance costs.

2.2. Common Examples of Overhead Costs

Some recognizable examples in business operations:

• Rent and utilities: Including office rental costs, electricity, water, internet, phone, online meeting platforms such as Zoom, Google Meet.
• Administrative costs: Purchase of office equipment, printing paper, drinking water, outsourced accounting fees, periodic auditing fees.
• Insurance: Property insurance, professional liability insurance, health or accident insurance for employees.
• Employee benefits: Internal event costs, office coffee and snacks, gym membership support, company retreat program.

3. Calculation and Allocation of Common Costs

Overhead costs are indirect costs that cannot be directly linked to a specific product or service but are still necessary for the business to operate, such as rent, utilities, management staff salaries, etc. Calculating and properly allocating overhead costs is a key factor in determining the correct product price, controlling the budget and optimizing financial efficiency for the business.

3.1. General Formula and Method

Overhead costs are typically recorded as centralized expenses, which are then allocated on a pro rata basis to specific departments or projects.

• Overhead Ratio = Total Indirect Costs / Allocation Measure
  (The allocation measure can be direct labor hours, labor costs, or machine hours.)
• General costs include: Indirect materials + Indirect labor + Indirect costs (management, distribution, operation...)
• Main indirect cost classification:
  • Production costs (factory rent, equipment maintenance, etc.)
  • Selling and distribution costs
  • Administrative and management costs

3.2. Methods of calculating Overhead Cost

Absorption Costing
This is a traditional accounting method that allocates all overhead costs to production costs.

• Advantage: Complies with GAAP standards, fully reflects all costs, supports accurate determination of selling price.
• Disadvantages: May cause profit distortion if fixed costs are not fully allocated.

3-step process:

• Cost Allocation: Assign direct costs to cost centers.
• Cost Apportionment: Reasonable division of common costs for using departments.
• Cost Absorption: Allocate overhead costs to individual products or orders.

Method marginal cost (Marginal Costing)
Only include direct variable costs in product cost.

• Benefit: Helps businesses make quick decisions when output changes.
• Distinctive: Fixed costs are not included in product costs, so it is easy to evaluate marginal profits for each unit of production.

3.3. Specific indirect cost allocation methods

Depending on the characteristics of the business and industry, you can choose the appropriate cost allocation method:

• According to direct material cost: Suitable for manufacturing industries using many raw materials.
• According to direct labor costs: Suitable when labor is the main factor in production.
• By Prime cost percentage: Based on the total cost of materials and labor.
• By direct labor hours: Easy to apply when there is specific time data for each job.
• Machine hour rate: Suitable for machinery-dependent manufacturing industries.
• By product unit: Used for mass production lines.
• Allocation by sales revenue ratio: Usually used for sales or distribution department.

4. The Importance of Managing Overhead Costs

Understanding What is overhead? (also known as overhead cost) and effectively managing this group of costs plays an essential role in all production and business activities. General costs include expenses that do not directly create products but are still necessary for the business to operate such as: electricity and water costs, indirect employee salaries, depreciation of fixed assets, etc. Below are the reasons why businesses need to pay special attention to managing general costs:

• Determine product cost: Reasonable allocation of overhead costs helps to fully calculate total production costs, thereby setting appropriate selling prices to ensure expected profits.
• Effective cost management: Optimizing overhead costs is a practical way to reduce financial burden without compromising product or service quality.
• Performance Evaluation: Tracking overhead costs helps businesses know which activities are costing too much so they can adjust or eliminate them if necessary.
• Financial planning: Forecasting and controlling overhead costs provides a solid foundation for future budgeting and cash flow management.
• Risk management: Analyzing indirect cost fluctuations over time helps businesses detect risks early and proactively respond.
• Make the right investment decisions: Understanding what overhead costs are and operating costs helps businesses determine the profitability of a project before investing.
• Business valuation: Overhead costs are one of the important factors in assessing the value of a business when raising capital or transferring.
• Improve labor productivity: Tracking the relationship between indirect costs and performance helps improve operational processes and maximize resource efficiency.
• Business strategy orientation: Cost analysis helps identify areas, products or services with high profit potential to prioritize development.
• Build optimal cost policy: Good management of general expenses creates the premise for building reasonable internal regulations, helping to control and coordinate spending more effectively.
• Production orientation and human resource organization: Based on cost analysis, businesses can determine the appropriate production scale and optimal organizational structure.
• Control indirect costs: Proactively monitoring and adjusting indirect expenses will help businesses improve overall profit margins.

In short, understanding What is overhead cost? and implementing appropriate overhead management methods not only helps businesses operate more efficiently but also creates sustainable competitive advantages in the market.

5. Solutions and Measures to Optimize General Costs

Overhead costs are one of the major factors affecting business profits but are often difficult to control due to their widespread distribution and difficulty in determining their true value. To optimize overhead costs effectively, businesses need to apply both strategic solutions and specialized support tools.

5.1. General solutions

Optimizing overhead costs is not just about cutting corners, but needs to be built on data analysis, risk assessment, and long-term efficiency. Here are some practical solutions:

• Identify and analyze costs: Review details of items such as service bills, indirect staff salaries, office rental costs, etc. to determine which costs can be cut or optimized.
• Optimize workflow: Automate and improve internal processes to minimize waiting time, limit errors, and increase productivity.
• Applying technology in cost management: Use accounting software, ERP software or cost management tools to track, control and analyze costs in real-time.
• Consider the value of expenses: Evaluate the effectiveness of each expense to identify non-value added costs and eliminate them appropriately.
• Compare suppliers and renegotiate contracts: Look for suppliers with competitive prices and equivalent or better service.
• Consider buying vs renting staff/equipment: Calculate long-term costs to decide whether to outsource or maintain an in-house team for support departments such as IT, HR, maintenance, etc.
• Choose the right rental formBetween lump sum and incidental rental, it is necessary to compare the total cost and the level of budget control to choose the most flexible solution.
• Temporarily cut non-essential expenses: During difficult financial times, it may be possible to temporarily eliminate some non-essential expenses such as training costs and ineffective marketing.

Before implementing any solution, businesses should fully assess the influencing factors including financial, operational performance and related risks to avoid unwanted consequences.

5.2. Specialized cost management systems

To optimize overhead costs in a systematic and transparent manner, businesses should consider implementing specialized financial management systems:

• Budgeting: Helps plan budgets for each period, closely monitor costs incurred actual vs. planned, so that timely adjustments can be made to avoid overspending.
• Activity-Based Costing (ABC): Effectively applied to manufacturing or large-scale enterprises, helping to accurately determine the costs of each activity, thereby detecting indirect costs that have not been reasonably allocated and finding solutions for improvement.

5.3. Applying technology in cost management (Especially with Bizzi)

Bizzi provides a comprehensive cost control system for businesses, acting as an AI assistant for the finance and accounting department in automating the revenue and expenditure process. This is an integrated platform with more than 30 features that help streamline and automate the process of cost management, debt collection and B2B payments.

5.3.1. Processing, reconciling and managing input invoices (IPA + 3way)

Managing incoming invoices is an important part of controlling overhead costs. With Bizzi, the entire process is automated, from receiving to reconciling and storing, helping businesses improve accuracy, save time and avoid financial risks.

• Automatically process input invoices: Use Bizzi Bot with RPA and AI technology to upload, check and reconcile invoices.
• Automatic invoice reconciliation – PO – GR: Reconcile invoice details with purchase orders (POs) and warehouse receipts (GRs) in real time to detect discrepancies.
• Verify valid supplier: Check tax code, activity status on tax system.
• Automatically record and store invoices: Store input invoices with a storage period of 10 years.
• Risky Invoice Warning: Detect invoices from suppliers that show signs of risk.
• API Integration with ERP & Accounting Systems: Synchronize data with accounting software and business management systems.

5.3.2. Business Expense Management (Bizzi Expense)

General expenses (overhead cost) arising from various operating activities within the enterprise. With Bizzi Expense, businesses can set up, monitor and optimize the entire spending process flexibly and transparently, while ensuring compliance with internal financial principles.

• Set up budgets by department/project: Allocate budget to control spending.
• Monitor spending and alert for budget overruns.
• Automated expense approval system: Speed up the spending request approval process.
• Real-time expense tracking and Create detailed expense reports by category, department or project.
• Establish and enforce spending policies to ensure compliance with company regulations.
• Flexible approval flow and Track spending request status.
• Electronic invoice authentication according to accounting regulations and attach spending to each project/task.

5.3.3. Travel expense management (Bizzi Travel)

Travel expenses are a significant part of the overall cost (overhead cost) of many businesses, especially with organizations that have inter-provincial or international business activities. Bizzi Travel provides a comprehensive solution to control, optimize and make transparent all work costs from planning to approval and reporting.

• Automatic flight booking: Integrate with ticket booking services according to approved budget criteria.
• Manage all business expenses: Airfare, hotel, transportation, food.
• Set up business travel spending limits for each employee or business trip.
• Work approval process in advance for travel and related expenses.
• Business expense report Overview by employee, trip, department.

5.3.4. Electronic invoice (B-invoice)

Issuing, storing and managing electronic invoices is an important factor that helps businesses control overhead costs in a transparent and legally compliant manner. With B-invoice, the entire invoice processing process is automated, helping to save time, minimize errors and improve financial efficiency.

• Create electronic invoices according to prescribed standards (XML/PDF), meet tax authority requirements.
• Custom Invoice Template by logo, private brand.
• Bulk Invoice according to order, customer.
• Direct connection to tax authority system to validate the invoice.
• Store invoices for at least 10 years.
• Look up, download & print invoices easily.
• Manage invoice status (released, sent, paid, canceled, adjusted).

5.3.5. Accounts Receivable Management (ARM)

Effective debt management not only improves cash flow but also helps reduce overhead costs (overhead cost) arising from bad debt, late payment and manual processing. Bizzi ARM Providing comprehensive debt management solutions, helping businesses monitor, reconcile and collect debts intelligently and promptly.

• Automatic debt reminder according to the script via email, text message.
• Track and reconcile debt and metrics like DSO, debt aging report.
• Debt due warning or signs of expiration.
• Reconciliation of debts and create detailed debt report.

5.4. Manufacturing Overhead Cost Management (MOC) Solution

• Intelligent asset management & maintenance system (CMMS/MMS): Helps organizations more effectively approach automated maintenance planning, asset management, incident warnings, saving time, costs, and improving production efficiency.
  • Track maintenance activities: Manage equipment information (parameters, productivity, warranty), monitor equipment status, periodic maintenance alerts, calculate depreciation costs, maintenance, repair, downtime.
  • Use data to determine solutions: CMMS data helps make optimal decisions between repairing and replacing equipment, cost optimization.
  • Data analytics to measure and predict future MOC costs: Based on asset tracking data, customized reports can be generated, predicting costs for maintenance, parts replacement, employee salaries, utilities, facility rental, etc.
  • Examples of solutions such as MMS-X by VTI Solutions Helps with scientific maintenance planning, real-time equipment information management, automatic fault warning, performance evaluation and predictive maintenance.

6. Handling Over and Under Allocation of General Costs

To optimize overhead In production, businesses increasingly focus on applying technology and modern management systems. One of the outstanding solutions is CMMS/MMS – smart maintenance and asset management system, helps control and optimize overhead comprehensively

• Deploying smart CMMS/MMS system: Helps businesses create automated maintenance plans, manage assets in real time, issue failure alerts, and remotely monitor equipment performance. This helps reduce costs caused by unexpected downtime and extend equipment life.
• Detailed tracking of maintenance activities: Store equipment information (performance, specifications, warranty period), monitor operating status, and remind about periodic maintenance schedules. This helps businesses control repair and depreciation costs and minimize them. downtime affect productivity.
• Leverage data to come up with optimal solutions: CMMS not only records the history of operation and maintenance but also helps analyze data to support decisions: repair or replace equipment. This helps businesses make timely decisions, avoid waste and reduce unnecessary investment costs.
• Analyze and predict future MOC costs: Based on the data stored from the CMMS system, businesses can prepare more accurate financial reports, predict expenses related to technical personnel salaries, component replacement, periodic maintenance, rental costs, utilities, etc.
• Practical example – MMS-X by VTI Solutions: This is one of the advanced equipment & maintenance management solutions, supporting AI-based maintenance planning, real-time machine health monitoring, early fault warning, helping to evaluate performance and provide accurate predictive maintenance actions.

Applying smart solutions such as CMMS/MMS not only helps businesses solve problems “What is overhead cost” but also brings a new approach to general cost management, reduce production risks and improve competitiveness in the market.

7. Conclusion

Clearly understand What is overhead cost? and how to classify the overhead will help businesses accurately assess operational efficiency and avoid uncontrolled spending. Tracking and analyzing overhead costs is not only an accounting requirement but also a core element of modern financial management strategies. To simplify this process, businesses can consider applying Comprehensive solutions from Bizzi – Support to optimize accounting processes, improve operational efficiency and minimize financial risks.

Businesses register for trial at: https://bizzi.vn/dang-ky-dung-thu/