Skip to content Skip to sidebar Skip to footer

An Easy Way To Calculate Company Overhead Costs

Table of Content

What is Overhead?

A simple sense of overhead is an additional cost or other expense incurred by the company, which is not directly related to the business process, and production is done in the company. These overhead costs may not be as large in number or are not incurred routinely because these overhead costs come from unexpected expenditures (non-budgeters). 

However, overhead costs should not be considered trivial and should remain in the budget as a miscellaneous expense for the company's business to be uninterrupted and continue to run properly.

To calculate overhead costs, then add all the ongoing business costs that make your business run but don't contribute to revenue-generating production processes. 

Thus, overhead is an indirect cost that remains to be incurred by the company to support the operation of the business and the company's businesses, such as administrative costs, sales promotion costs and marketing costs, and product delivery costs.

By counting and recording overhead costs that happen regularly, it will be able to help you save money, as well as get better prices for your products and services as well as allow you to streamline the company's business operations.

In this article, the discussion below will include:
  • How to calculate overhead costs
  • How to calculate the overhead absorption rate
  • How to calculate the overhead rate per employee


To calculate overhead costs, you can follow the steps below:

1. Fee List

Make a comprehensive list of indirect business expenses including items such as rental tools, rental of buildings, taxes, utilities, office equipment, factory maintenance, and so on. Those items are your type of overhead. 

Direct costs related to the production of goods and services, such as manpower and raw materials, are not included in the overhead costs but enter into the selling price of the product.

While you're trying to categorize the cost directly and overhead, remember that some items can't be attributed to those two categories. Some company business expenses may be an overhead cost for others.

2. Add Overhead

The monthly Total overhead cost is calculated as an aggregate overhead cost. This is the amount of money you need to run your business.

3. Calculate Overhead Levels

Overhead or percentage overhead costs are the amount spent by your business making products or delivering services to customers. To calculate it is to divide the indirect cost at a direct cost and multiply it by 100.

If your overhead costs 20%, it means your business spends 20% of the company's revenue to produce good services or satisfaction with your customers. Lower overhead costs indicate greater efficiency and profitability for the company.

4. Compare With Sales

When setting a price and making a budget, you need to know what percentage of one dollar is allocated for overhead. To calculate the proportion of overhead compared to sales is to divide the monthly overhead by a monthly sales number, and multiply it by 100.

For example, company business with monthly sales of $ 10 billion and overhead costs $ 4 billion, having ($$ 10 billion) x 100 = 40% overhead.

5. Compare To Labor Cost

To measure the size of efficiency with business resources being used, calculating overhead costs as a percentage of labor costs. The lower the percentage, the more effective your business is in utilizing the existing resources.

The trick is to divide the total overhead with the total cost of labor for the month and multiply by 100, hence the percentage will be obtained.

There are several methods or ways to calculate the rate of absorption of overhead costs, among others:


An Easy Way To Calculate Company Overhead Costs
image via freepik

The indirect cost amount is known as overhead. Indirect costs incurred by the company can be tracked. Overhead absorption is required by accounting for external financial reporting.

Overhead is associated with products or services based on direct working hours, machine hours, direct labor costs, and so on. The level of absorption of overhead is calculated to include overhead in the production costs of goods and services. It is used to determine the amount to be debited for indirect labor, materials, and other indirect costs for the production process and the ongoing work.

There are several methods or ways to calculate the rate of absorption of overhead costs, among others:

1. Percentage On Direct Material Method

Direct material cost is one of the main components of the cost of the product. Under this method, the absorption rate is based on the cost of the ingredient directly. To calculate this cost, the way is to divide the overhead with the approximate or actual cost of the direct material that the company is issued and multiplied by 100.

Percentage on direct material cost = overhead/Direct material x 100

2. Direct Labor Cost Method

The actual cost of work is calculated by dividing the load by direct wage and expressed as a percentage.

Direct labor Cost (percentage) = overhead/Direct wage x 100

3. Key Cost Percentage Method

The main cost is the amount of direct labor and the direct material cost of a business. To calculate the size of the main cost percentage is to divide the factory overhead costs by the main cost and multiplied by 100.

The main cost of percentages = overhead/main cost x 100

4. Method Of Working Hours

The working hour rate is calculated by dividing factory overhead costs by direct working hours.

The calculation is as follows:

Working hour rate = overhead/working hours

5. Machine Clock Level

The machine clock level is calculated by dividing the factory overhead costs by machine clock.

Clock engine rate = overhead/engine hours

6. Selling Price Methods

Under this method, the overhead cost is divided by the selling price of the production unit.

Selling price = Overheads/Sell production unit price


To calculate the overhead cost per employee, the way is as below:

Calculate labor costs that include not only paid weekly or hourly but also health benefits, vacations, retirement, and retirement benefits paid by the company.

Calculate Total Overhead Cost

1. Divide the overhead by the number of billable hours. For example, if your business has six technicians, the overhead is divided between the six technicians.

2. Adding overhead costs and labor costs to billable hours gives you the net cost of that employee to your company's business per hour.

3. By lowering the proportion of overhead, the company can gain a competitive advantage, either by increasing the profit margins or the price of its products to be more competitive.

So, that is an article on how to calculate the company's overhead costs. Hopefully, this article can provide added value and can be useful for you.

Post a Comment for "An Easy Way To Calculate Company Overhead Costs"