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Overhead Costs

ABUS 056


A category of indirect costs that supports a specific part or function of a company, but not the entire company. Overhead costs support multiple cost objectives. Common examples include material handling, supervision, production control, and manufacturing.

Alternate Definition
Overhead costs are indirect costs which supports a production function. Examples would include material overhead (inventorying, forklifts, warehousing and storage of the material, etc.), manufacturing overhead (lease and rental payments, utilities, etc.) and engineering overhead (engineering support, office and lab space, utilities, etc.).
General Information

Indirect costs are made up of two major categories: Overhead and General and Administrative (G&A) expenses. Depending on the contractor’s way of doing business, overhead costs may be broken into lower level such as manufacturing, engineering and material. The indirect costs tied to these levels are grouped together in what are known as pools.


The CPRG, Volume 3, Chapter 9 and Volume 4, Chapter 2 describe how to allocate indirect cost pools across contracts or product lines, where businesses create “allocation bases” which are divided into the total amount of each pool to derive a rate. For example, projected manufacturing labor hours or dollars for the entire business unit of the next year can be divided into the planned manufacturing overhead pool to derive a manufacturing overhead rate. This rate is then applied to the direct manufacturing labor for each product or contract, thus equitable allocating the indirect manufacturing costs. The same process would be done for other areas such as engineering or material costs.