How to Calculate Overhead Rates

Overhead is a term used by management accountants that refers to all shared costs of an organization. The term is primarily used to refer to the shared costs for manufacturing- and service-related companies. Common examples of business overhead costs include rent, utilities and personnel (administrative) wages. Overhead charges are commonly referred to as a fixed charge of doing business, while non-overhead costs are usually variable.

Instructions

1. Define and calculate your shared costs. Again, these are expenses that are shared by everyone who works for an organization. Determine what the these costs are for your organization, i.e., accounting, human resources, rents and utilities.

2. Sum for the total shared costs for the organization. These are your overhead costs.

3. Determine your non-overhead costs. The business world refers to shared costs as indirect (overhead) and non-shared costs as direct (non-overhead). Overhead costs are also usually fixed costs, whereas non-overhead costs are variable costs. Non-overhead costs are the incremental costs associated with creating your product or selling your service. This includes materials and the direct labor used.

4. Calculate your overhead rate. This is calculated by dividing overhead costs by non-overhead costs. For instance, lets say your rent, utilities, and administrative costs are $20,000 every month. You've had a great month, and sold a lot of product so your non-overhead costs (costs of production) are higher than normal. They stand at $50,000, which is $10,000 more than usual. The overhead rate is $20,000/$50,000 or .4.

5. Track monthly, quarterly and annually to identify trends in spending over time.

References

• Investopedia: Overhead
• INC: How do I calculate my overhead rate?