How to Calculate Overhead Burden

Calculating overhead

Overhead is one of those accounting terms that has come to mean many things, but in general it refers to all costs other than direct labor and material costs. More commonly used in manufacturing settings, overhead is also used synonymously to describe the fixed costs of doing business. Calculating the overhead burden is fairly simple if you have the right data.

Instructions

1. Request a list of all cost accounts. Specifically, you want those accounts that are classified as overhead. These are all accounts that are not directly related to the creation of goods and services for the organization.

2. Identify all overhead line items. Common overhead costs include rent, utilities (electricity used to operate equipment), depreciation, building and factory supplies, and labor other than direct labor.

3. Check to see whether overhead costs identified are fixed or variable. Most overhead costs are fixed. This is a good way to test and/or verify that overhead expenses are classified correctly.

4. Sum all overhead line items. Most overhead reports are created on a monthly or quarterly basis. Tracking overhead rates over time will highlight trends.

References

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