overheads

Overheads are the other kind of business costs. Since direct costs vary with the level of production, they are referred to as product costs; they attach themselves to your craft widgets. Overheads, on the other hand, are independent of volume. They are referred to as period costs, since they are incurred independent of volume, and are generally recurring over time.

Examples of overheads include rent on your studio, interest on business loans, office salaries, insurance, office supplies and show expenses. Some overheads exhibit some characteristics of direct costs, such as show expenses, but for present purposes let's just consider these step-variable costs as fixed costs, or overheads. The behavior of costs over time and volume is a discussion in and of itself.

Overheads happen whether you sell a thousand craft widgets or none. When you are working a show, you're getting hit twice: you aren't making any widgets, and those overheads just continue to pile up. The best you can hope for is to ensure that you've reduced your overhead costs to a bare minimum consistent with your volume, and that you've properly accounted for all of them in setting your prices.

   
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