Is Salary Considered an Overhead Cost?

Introduction

The classification of salary as an overhead cost or a running expense often leads to confusion among business owners and financial analysts. To clarify this, we must delve into the different cost structures of a company and how salaries fit into these categories.

Understanding Overhead Costs

Overhead Costs:

Overhead costs, sometimes referred to as General and Administrative Expense (GA), encompass a range of expenses that are necessary for the running of a business but are not directly tied to the production of goods or services. These costs are typically fixed or semi-fixed and include:

Rent Utilities Cleaning and maintenance Salaries for administrative, finance, payroll, and middle to senior management

These costs do not change significantly with fluctuations in business volume and are essential for the smooth operation of an organization.

Classifying Salaries

The classification of salaries can vary depending on the nature of the role within the company. Here’s how salaries generally fit into different cost categories:

Overhead Salaries

1. Administrative Salaries:

Salaries for administrative staff, such as office managers, HR personnel, and secretaries, are typically considered overhead costs. These employees do not engage directly in the production process and are essential for the day-to-day operations of the company. Their salaries are fixed and contribute to the general and administrative expenses.

Running Expenses Salaries

2. Running Expenses Salaries:

Salaries for managers and executives, as well as those in finance and payroll, can sometimes be considered running expenses. These roles often have a broader impact on the company's operations. While they are necessary for the smooth functioning of the company, they are not directly tied to the production or delivery of goods or services. These salaries may fluctuate slightly based on the company's performance and can be adjusted based on the organization's financial health.

Cost of Sales (COGS) Salaries

3. Cost of Sales (COGS) Salaries:

Salaries for salespeople and sales managers fall under the Cost of Sales category. These employees directly contribute to the revenue generation of the company. Their salaries, along with bonuses, commissions, and related expenses, are considered variable costs. They operate on a commission-based model or receive bonuses that increase with the sales volume. As such, these costs can expand or contract based on the company's performance and the level of revenue generated.

Cost of Goods Sold (COGS) Salaries

4. Cost of Goods Sold (COGS) Salaries:

Salaries for employees directly involved in the production process or the delivery of services are categorized under the Cost of Goods Sold (COGS). These employees are essential to the manufacturing or service delivery, making their salaries variable costs. Increases in production or service delivery correlate with an increase in the number of employees required, leading to a rise in these costs.

Conclusion

The classification of salary as an overhead cost or a running expense depends on the role and function within the organization. Understanding this distinction is crucial for effective financial management and accurate cost analysis. By properly categorizing salaries, businesses can better allocate resources and optimize operational efficiency.

Keywords: salary, overhead cost, running expenses