What are Overhead Costs? Why They Matter for Your Business

Overhead costs are unavoidable in business. While they aren’t directly tied to producing goods or services, they can quietly eat into profits if not managed carefully.

In this article, we’ll explain the different types of overhead costs, how to calculate them, and why businesses need to understand and manage them well.

We’ll also share handy tips to help you reduce business overhead costs and introduce Wise Business — a great way to cut hidden overhead costs on international payments.

Table of contents
What are overhead costs? Common examples of overhead costs for Singapore businesses How to calculate overhead costs Tips to reduce your business overheads Why it’s important for SMEs and startups to review overheads regularly

What are overhead costs?

Overheads are expenses that aren’t directly tied to producing a product or providing a service—they're indirect costs. You can think of them as the expenses required to keep your business running, even if you don’t make any sales.

These can include rent, utilities, and administrative expenses.

On the other hand, costs directly related to the production of goods or services are considered direct costs rather than overheads. Direct costs are the expenses you must incur to produce a product or deliver a service.

Common types of overheads

Overheads are generally categorised into three main types:

1. Fixed overheads

Fixed overheads are indirect costs that stay the same over a set period, no matter how much your business activity increases or decreases. They do not fluctuate with daily operations, making them predictable expenses.

Examples can include rent, insurance, and license fees.

2. Variable

A variable overhead is a cost that is not directly tied to the production of goods or services but fluctuates based on the level of business activity. Variable overheads increase when business activity rises and decrease when it slows down.

Examples include utilities, office supplies, and marketing expenses.

3. Semi-variable

Semi-variable overheads are indirect costs that have both fixed and variable elements.

For example, internet, phone, or software subscriptions may have a fixed monthly fee but charge extra if usage exceeds the plan limit.

Common examples of overhead costs for Singapore businesses

Below are common examples of overhead costs incurred by businesses in Singapore:

• Rent: Rent is a major overhead for businesses operating in Singapore, as it is one of the most expensive cities in the world for office space and other commercial properties¹.
• Utilities: Singapore also has some of the highest utility costs in Southeast Asia, and its hot climate results in high electricity usage for air conditioning² ³.
• Admin expenses: Singapore businesses incur various administrative costs that contribute to their overhead costs, including office supplies, business software, and wages for HR, finance, and reception staff.
• Foreign transaction fees: International transactions or currency conversions can be considered overhead costs if they don’t directly contribute to revenue generation from a specific product or service, but are necessary for facilitating cross-border operations.

💵 Spending a lot on foreign transaction fees? Manage these overheads better with Wise Business to help keep your international operations profitable. ➡️Learn more about Wise Business ⬅️

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How to calculate overhead costs

You can calculate your overhead costs by adding up all indirect expenses that aren't directly tied to producing a good or service over a given period, such as a month or a year.

For example, if a Singapore-based SME has the following monthly overheads:

• Rent: S$4,000
• Utilities: S$1,000
• Administrative salaries: S$2,250
• Foreign transaction fees: S$200
• Other miscellaneous expenses: S$300

Then, the total monthly overhead cost would be S$7,750.

Once you know your total overhead cost, you can calculate the overhead rate, which helps businesses get a clearer picture of the hidden costs behind each unit of production. This gives you a more accurate idea of what it truly costs to produce your goods or services.

The formula is:

Overhead rate = Overhead costs/Allocation measure

Where we are dividing total overhead costs by an allocation base, such as:

• Direct labour hours
• Direct labour costs
• Machine hours
• Units produced

Example

Imagine a small electronics manufacturer in Singapore that wants to determine its overhead rate based on direct labour hours.

Their total monthly overhead costs are S$25,000. And their manual assembly line staff work 1,600 direct labour hours per month to manually assemble circuit boards.

Therefore, the overhead rate is calculated as follows:

• S$25,000 / 1,600 = S$15.63 per direct labour hour

This means that for every hour of labour, the manufacturer incurs an additional S$15.63 in overhead costs. This overhead rate can then be used to price its circuit boards more accurately or assess overall profitability.

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Tips to reduce your business overheads

Here are some simple tips to help reduce overheads:

1. Negotiate contracts and purchases

Renegotiating contracts with suppliers, landlords, and service providers can often help your business secure better deals. Getting multiple quotes before committing and leveraging your history with long-term vendors can also help ensure you're not overpaying.

💡 Pro-tip: If your team is confident that certain items or services will be consistently needed, consider making longer-term commitments or bulk purchases to lock in better prices and reduce overhead costs.

2. Use digital tools to monitor overheads

Digital tools make it easier to track transactions, manage spending, and identify unnecessary costs. Whether opting for cloud-based accounting software or a fintech business account, you can reduce manual admin and gain better visibility into your finances.

With Wise Business, you can manage money across multiple currencies, accounts, and cards, helping you control spending and avoid unnecessary expenses like foreign transaction fees, hidden forex markups, and inflated exchange rates.

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3. Review subscriptions

Many businesses pay for software and other subscriptions they don’t actually use, need, or even realise they have. Reviewing corporate banking account statements and payment records can help identify active subscriptions.

Check usage reports for each one to see how often it's actually being used. Downgrade to a cheaper plan where possible or cancel anything unnecessary.

4. Optimise office space

Office and retail space is a major expense, especially in Singapore’s business districts. Review your current setup and see if you can reduce or relocate office or commercial space where possible.

You might also consider letting employees work remotely or in a hybrid setup to cut down on the space needed. Switching to shared workspaces, like co-working offices, can also help save costs.

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Why it’s important for SMEs and startups to review overheads regularly

While not directly tied to production, overheads significantly impact a business's income statement and balance sheet. They can also influence product or service pricing. Miscalculating them can lead to underpricing or overpricing, which can reduce profits and hurt sales.

Keeping an eye on overheads is crucial for small businesses, as they often operate within tight financial margins. Regularly reviewing them helps startups and SMEs cut unnecessary costs, maintain profitability, and stay competitive.

How Novelship Slashed Costs and Boosted Efficiency

Novelship is a leading online marketplace for sneakers, apparel and collectibles in Singapore. They initially paid suppliers manually through their bank, only to realise it was a slow, clunky process with a hidden downside—the exchange rate included a markup or spread, effectively an extra fee. This additional cost made international payments more expensive and ate into their profits. If they hadn’t taken the time to review their expenses, they might never have caught this costly issue. ➡️ Learn how Novelship went on to use Wise Business to make paying invoices and international suppliers easier, cheaper and more efficient

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Conclusion

Overheads are costs that aren’t directly tied to producing goods or services but are still essential for keeping your business running smoothly. They fall into three main categories: fixed, variable, and semi-variable. Common examples include rent, utilities, and admin expenses.

Businesses need to monitor, understand, and calculate overhead costs to get a true picture of what it costs to run the business. Factoring in these costs also helps them price their goods and services appropriately. When overlooked, overheads can quietly eat into a business’s profitability.

By following the tips we shared—like renegotiating contracts, getting multiple quotes, reviewing subscriptions, and using digital tools—you can keep your overhead costs in check and even reduce them.

💡If you’re planning to enter new markets or outsource abroad, why not consider Wise Business as a way to reduce overheads by ensuring your international financial transactions remain cost-effective and efficient?

Here’s what you can get with Wise Business:

• Always get the mid-market rate with zero markup
• Send and receive payments internationally without hefty foreign transaction fees
• Hold and manage 40+ currencies
• Get local account details in multiple currencies to receive payments like a local
• Issue physical and virtual cards to employees
• Seamless integration with popular accounting software
• No monthly or annual fees

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Sources:

1. Savills Singapore | Singapore ranks 6th most expensive city for office space
2. How Singapore’s water tariffs compare with other countries - The Business Times
3. SEA: fuel and electricity cost comparison by country | Statista

Sources checked on: 14th March 2025