How to Calculate Overhead Costs in Managerial Accounting

Before computers, accountants calculated overhead costs from manually kept ledgers.

Managerial accounting provides managers with internal reports to determine the profitability of the company. Managerial accounting focuses on internal systems and data, whereas financial accounting’s focus is external, geared toward creditors, stockholders and investors. Managers use accounting data to control direct production costs but also to review and analyze overhead costs. Overhead costs consist of expenses incurred by simply being in business, not related to the cost of creating the product.

Instructions

1. Assemble the needed monthly expense reports for the company. Add together the payroll costs for all people not associated with creating the product. This includes wages, salaries, fringe benefits and employer taxes. Include that data for workers from the top to the bottom levels of the company, from the top executives and their staffs to the receptionists or file clerks, excluding those whose wages are directly related to the product.

2. Calculate all the costs necessary to run the business -- rent, utilities, property taxes, office supplies, maintenance -- and add them together. Include office equipment maintenance and repairs, janitorial services and supplies, dues and subscriptions, travel and expense reimbursements, advertising, marketing, company insurance and other ancillary operating costs not directly related to producing the product. Include interest expense (interest paid on notes payable) and depreciation of equipment not related directly to production, such as company vehicles.

3. Add the figures from steps 1 and 2 to obtain the overhead expenses. Overhead costs are considered “Selling, General and Administrative” expenses added together with “Interest Expense.”

References

• AccountingCoach; Manufacturing Overhead; Harold Avercamp
• AccountingCoach; Nonmanufacturing Overhead; Harold Avercamp