Which are Overhead Costs?
Overhead costs, often referred to as overhead or operating costs, refer to those expenses related to running a company which can’t be linked to producing or developing a product or service. They are the expenses that the company incurs to stay in operation, irrespective of its accomplishment level.
Overhead costs are the costs on the company’s income statement except for the ones that are directly related to manufacturing or selling a product, or providing a service. A potter’s clay and potting wheel are not overhead costs since they are directly related to the products made. The lease for the facility where the potter creates is an overhead cost because the potter pays rent when she’s producing products or not.
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Overhead Cost Examples
A company’s overhead costs are based on the character of the provider. A merchant’s expenses will differ from a mechanic or a crafter’s. Typical examples include:
- Salaries that are not job- or product-specific
- Office equipment such as computers or phones
- Office supplies
Kinds of Overhead Costs
Overhead costs can be broken down into three types:
Fixed expenses are the exact same each month — for example lease. Variable costs increase or decrease, depending on how busy the business is. This might include salary for certain workers. Semi-variable costs are those that are incurred irrespective of the action level, but that may increase as business gets busier. By means of example, an accountant in the U.S. consistently use printer toner, but might use it in the first quarter of the year when preparing and printing tax forms for clients.
It’s vital to monitor overhead costs. As they are not directly linked to earnings, they can drain a business unnecessarily when not properly controlled. The conventional small business example of unnecessary overhead is the startup entrepreneur who rents office space in a fashionable place for an operation that could be home until expansion requires additional room for staff and equipment. The money spent on rent might be better spent in advertising or promotion into the brand new, unknown organization.
What is Private Label?
A private label product is created by a contract or third party manufacturer and sold under a retailer’s brand name. As the merchant, you specify everything about the product — what goes in it, how it’s packaged, what the label looks like — and pay to have it produced and delivered into a store. This is compared to buying products from other companies with their brand names on them.
By means of example, Target sells a variety of branded snacks from companies like General Mills and Frito-Lay, but it also market its crackers and chips under the Archer Farms maker — Target’s private label maker.
Hair salons often create their own branded line of shampoos, conditioners, and styling products for their customers to buy and take home. Restaurants often decide to personal label condiments or combinations which are extremely popular with clients. Maid services could private label a line of household cleaners and pet stores could private label a line of pet foods and grooming tools.
Private Label Categories
Almost every consumer product category has both branded and private label offerings, including:
- Personal care
- Paper products
- Household cleansers
- Condiments and salad dressings
- Dairy items
- Spicy foods
While private label products are in the minority, comprising 15 percent of U.S. supermarket sales, according to the Harvard Business Review, some private label groups are seeing strong growth, according to a Nielsen Report.
Advertisers interested in filling their shelves with products featuring their brand name have good reason. Some of the biggest advantages of private label products include:
- Control over production — Third-party manufacturers function at the merchant’s management, offering full control over product components and quality.
- Control over pricing — Because of control over the product, retailers can also determine product cost and profitable pricing.
- Adaptability — Smaller retailers have the capacity to move quickly to obtain a private label product in production in response to growing market demand for a new feature, while larger companies might not be contemplating a market merchandise.
- Control over branding — Private label products bear the brand name and packaging layout produced by the retailer.
- Control over profitability — Because of control over production costs and pricing, retailers thus restrain the amount of profitability its goods provide.
The disadvantages of integrating a private label line are few, assuming you have the financial resources to invest in producing such a product. The main disadvantages include:
- Manufacturer dependency — Since development of your product line is in the hands of a third party manufacturer, it’s important to associate with well-established businesses. Otherwise, you could miss out on opportunities if your manufacturer runs into problems.
- Difficulty building loyalty — Established household producers have the upper hand and can often be found in an range of retail outlets. Your product is only likely to be sold in your stores, restricting customer access to it. Naturally, limited availability might also be an advantage, giving customers a reason to return and purchase from you.
Though private label products are often sold at a lower price point than their name brand brethren, some private label brands are now being positioned as premium products, with the higher price tag to prove it.
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