Overhead Costs

Overhead Costs

Overhead Costs, those which are not directly attributable to particular units of production. They consist of the costs of fixed factors and common costs (i.e. those which vary with output but which cannot be allocated to specific units of output). For example, a truckload of assorted parcels represents a carriers output of different services for different consignors. Apart from the individual handling charges for each parcel (if they could be separated), all other charges would be overheads. Some would represent fixed costs (such as depreciation of the truck); some common costs (petrol and oil, driver's wages ) could be allocated to the trip but not to any given parcel. The interesting economic problems relate to the method of charging for and recovering overheads.

Overloaded Economy, one in a state of suppressed or repressed inflation: total demand exceeds total supply -valued at current prices, but prices are prevented from rising by controls. Inflation may be successfully repressed in wartime when consumers are prepared to accumulate in paper claims (saving certificates, war bonds, savings accounts) the money they are prevented from spending; but in peacetime their excess purchasing power induces manufacturers and distributors to nm down stocks in their efforts to satisfy customers and create goodwill, or diverts production from exports to the home market and attracts additional imports, so leading to balance of payments difficulties.

The running down of stocks in repressed inflation contrasts with the accumulation of stocks in open inflation when prices are rising. In the latter stocks of real assets provide a hedge against the increasing prices; but if prices are prevented from rising there is an incentive to run down stocks in order to sell. Hence in repressed inflation 'bottlenecks' tend to appear because stocks have been run down below the levels needed to cope with industrial change This tendency has led an overloaded economy also to be referred to as an 'empty economy', one that is empty of stocks. Administrative costs prevent price controls from covering the whole range of output, and they are usually confined to the more essential commodities. Prices rise in the uncontrolled sector and attract more resources into producing goods or services regarded as relatively less essential. This tendency has led to an overloaded economy also being referred to as a 'milk bar economy' because it tends to inflate the service trades.

Basically the British economy has been overloaded because it has attempted more than its resources could achieve: increased personal consumption, increased industrial investments, increased 'social' investment (schools, houses, roads, etc.), large defence forces, aid to under-developed countries. The solution is more rapid expansion in output or reduced expenditure, or both. Political objections to removing restrictive practices have prevented economic growth and the risk of loss of political support has prevented reductions in public expenditure.


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