Estimating Practice Exam

Which term describes the fixed costs associated with running a business?

1. Variable Costs

2. Overhead Costs

3. Direct Costs

4. Indirect Costs

The correct answer is: Overhead Costs

Overhead costs encompass the fixed expenses necessary for running a business that are not directly tied to the production of goods or services. This includes expenses such as rent, utilities, salaries of non-production staff, and insurance. These costs remain relatively stable regardless of the level of production or sales activity, making them a central aspect of fixed costs. Understanding overhead costs is crucial for businesses as they need to cover these expenses to maintain operations. Properly managing and estimating these costs helps in pricing products, budgeting, and financial planning. This distinguishes overhead costs from variable costs, which fluctuate with production volumes, while direct and indirect costs refer to different ways in which expenses can be attributed to products or services.