What is one of the key risks associated with overhead costs?

Overhead costs represent the ongoing expenses that are not directly tied to producing a product or service. One of the key risks associated with these costs is their potential to significantly impact an organization's profitability. This is because overhead costs can be substantial and, if not managed effectively, can eat into the margins generated by sales. High overhead costs may lead to reduced profitability, especially if revenues are not sufficiently high to cover these fixed expenditures.

Understanding the nature and behavior of overhead costs allows organizations to make informed decisions about pricing, budgeting, and cost control measures, ultimately helping to safeguard their financial health. The ability to monitor these expenses closely and adjust operations or pricing strategies accordingly is crucial for maintaining profitability.