What is Corporate Overhead?

Corporate overhead is comprised of the costs incurred to run the administrative side of a business. These costs include the accounting, human resources, legal, marketing, and sales functions. This cost can be quite substantial for a larger business that runs a number of subsidiaries, since it may have centralized accounting, purchasing, and legal functions.

Accounting for Corporate Overhead

When corporate costs are incurred, they are considered to be period costs, and so are charged to expense as incurred. Unlike factory overhead, corporate overhead is not accumulated into a cost pool and then allocated to the number of units produced.

Corporate Overhead Allocations

The concept of corporate overhead is somewhat different in a multi-subsidiary company. In this situation, corporate overhead is considered to be the cost to operate the corporate parent. The people working at the parent entity are engaged in such activities as setting policies and procedures for the subsidiaries, reporting consolidated results, and engaging in merger and acquisition activities. The management of the company may choose to allocate these overhead costs to the subsidiaries owned by the parent, based on some activity measure, such as the sales or profits of the subsidiaries. This accounting treatment is not recommended, since it skews the reported profitability of the subsidiaries, hiding their true profitability. A better approach is for the costs of the corporate parent to be immediately charged to expense with no allocation elsewhere.

Impact of Corporate Overhead on Breakeven

Corporate overhead always increases the breakeven point of a business, since it increases the cost base of the organization. For this reason, it is good practice to maintain tight control over these costs. In many cases, a business experiencing financial difficulties will cut its corporate overhead costs first, in order to reduce expenses that do not have a direct impact on sales.