Explain the concept of 'overhead costs.'

Overhead costs refer to indirect costs that cannot be directly linked to the production of specific goods or services. These are ongoing expenses that a business incurs to maintain its operations, which are necessary for production but do not directly impact the final product. Examples of overhead costs include utilities, rent, administrative salaries, and depreciation of equipment.

Understanding overhead costs is crucial for accurately assessing the total cost of production and setting appropriate pricing strategies. While direct costs, such as raw materials and direct labor, can be easily traced to specific products, overhead costs are allocated across all products based on a reasonable basis, which is why they are considered indirect. Recognizing and managing these costs effectively allows businesses to maintain financial health while ensuring competitive pricing and profitability.