What Is a Burden Cost?

Also known as overhead, a burden cost is an expense that is considered important to a business operation but does not directly contribute to the actual creation of a good or service. Instead, expenses of this type often provide the framework for the operation of the company, essentially helping to maintain an environment in which that production may take place. As with all types of business expenses, a company will track each burden cost and attempt to manage it in a manner that is in the best interests of the operation.

One of the easiest ways to understand what constitutes a burden cost is to identify expenses that are necessary within the operation, but don’t really add directly to the goods or services produced. Some expenses obviously do contribute directly to the end products, including the direct labor of those who work on the production line or the cost of the raw materials used to create those products. Other essentials such as the administrative and clerical functions that keep the business going, or even expenses like the rent or lease payments made on the building in which the operation is housed are indirect expenses and classed as burden costs.

A burden cost can take on many forms in a business operation. The expense associated with maintaining and repairing machinery used in the production process falls into this category. In like manner, the benefits offered to workers such as health insurance, vacation and sick days, and other extras are also considered to be burden costs. The cost of the natural gas, water, and electricity used to operate the facility in general, including the administrative offices, is another type of burden cost. Essentially any legitimate business expense that is related to the upkeep and maintenance of the facility but is not directly connected with the final goods produced can be considered a burden cost.

In many companies, the overall burden cost constitutes a major portion of the expense. To this end, review of each cost periodically can help to identify when and how reductions can be made, either by eliminating administrative, managerial or clerical positions that are not needed, or finding ways to trim consumption of certain goods and services without negatively impacting the production process. When burden cost can be kept to a minimum, the company can operate with a smaller budget, and increase the amount of return generated by the sale of each unit of the finished product.