How to Calculate Variable Overhead

Calculating overhead.
Calculating overhead. (Image: Calculator image by Alhazm Salemi from

For most people, budgets aren't a fun subject. They require a great deal of planning and effort from various departments in an organization. One of the most important considerations in budgets and planning is understanding the difference between fixed and variable costs. Fixed costs remain the same regardless of sales volume. The most common fixed costs are rents and utilities. Variable costs are those costs that vary according to production; that is the higher the sales volume, the higher the costs. Overhead has components of fixed and variable costs.

Obtain a yearly or monthly account statement for your company. You can usually request one from finance or accounting. Tell them you would like a list of all costs incurred for the month or year. This will depend on your calculation.

Identify overhead items. Overhead is indirect labor. This includes indirect labor, indirect materials, utilities, material handling and any other shared administrative task.

Identify variable overhead items. These are overhead costs, which increase in total as the total amount of output increases. One example is the cost of electricity or the cost of manufacturing supplies. In general, these are overhead costs, which fluctuate in response to direct labor hours.

Sum all variable overhead cost items found in Step 3. Take an average over two time periods for the most accurate measure. For instance, if you want to calculate variable overhead for the first two quarters of the year you can take the average of Quarter 1 and Quarter 2.

Walk through a quick example. Let's say the variable overhead in Quarter 1 is $5,000 and the variable overhead in Quarter 2 is $15,000. The average variable overhead for the past 2 quarters is $5,000 + $15,000 = $20,000/2 = $10,000.

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