Overhead Costs

John Maurice Clark wrote in 1923 that the term overhead costs is ‘variously used’, although there is the central underlying concept that these costs are ‘costs that cannot be traced home and attributed to particular units of business in the same direct and obvious way in which, for example, leather can be traced to the shoes that are made from it’. ‘Most of the real problems’ stem from the fact ‘that an increase or decrease in output does not involve a proportionate increase or decrease in cost’ (1923, p. 1). The notion of overhead costs is similar to that of Alfred Marshall’s ‘supplementary costs’, that is, charges or expenditures that, unlike ‘prime’ or ‘direct’ costs, ‘cannot generally be adapted quickly to changes in the amount of work there is for them to do’ (1920, p. 360). Thus overhead costs, a term used infrequently in economic theory or analysis nowadays, are akin to the more familiar ‘fixed costs’ (as in the variable costs/fixed costs dichotomy). However, the feature that they cannot be traced directly to particular units of output or activities gives overhead costs some of the flavour of common or joint costs.