Certified Professional Public Buyer (CPPB) Practice Test

What does overhead in budgeting usually refer to?

1. Fixed costs not affected by production

2. Variable costs that fluctuate

3. Direct costs of goods sold

4. Costs indirectly related to the production process

The correct answer is: Costs indirectly related to the production process

Overhead in budgeting typically refers to costs that are indirectly related to the production process. These are expenses that are necessary for running a business but do not directly contribute to the creation of a product or service. Overhead can include costs such as utilities, rent, administrative salaries, and office supplies. Understanding overhead is essential for accurate budgeting, as it impacts the overall financial health of an organization. By tracking and managing overhead costs effectively, organizations can ensure they maintain a good balance between their direct production costs and their indirect expenses, leading to more informed decision-making in budgeting and financial planning. The other options focus on fixed costs, variable costs, or direct costs of goods sold, which are different from overhead in that they are directly tied to the production of goods or services rather than being ancillary expenses that support overall operations.