Total Overhead Contribution and Accounting Terms

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Accurately calculate your overhead contribution to determine profit margins.
Accurately calculate your overhead contribution to determine profit margins. (Image: Comstock Images/Comstock/Getty Images)

"Total overhead contribution" refers to the costs associated with operating a business. It is imperative to know the total amount of overhead contribution when calculating pricing and providing estimates for services to be provided. A portion of overhead costs should be included in the selling price of products and services to maintain a net profit.

Fixed Overhead Costs

"Fixed overhead costs" are costs associated with a business operation that are consistent over a period of time. Rent, mortgage payments, property taxes, salary wages, depreciation and vehicle and equipment leases are examples of fixed overhead costs. The payment amounts are the same every month.

Variable Overhead Costs

"Variable overhead costs" are costs associate with a business operation that can fluctuate monthly. Utility costs such as natural gas and electricity are variable overhead costs. The payment amount changes based on usage. For example, your electric bill may be higher in the summer months due to running the air-conditioning unit to cool your building. Labor may also be a variable overhead cost. The amount of labor expense can vary over a period of time based on the amount of goods produced or services provided.

Budget Overhead Contribution Costs

"Budget overhead contribution costs" are an estimated amount of what you expect your overhead costs to be. These amounts are determined based on past costs and how much you anticipate your future expenses will be. Budgeted costs can be used to determine pricing and control expenditures.

Overhead Cost Variance

The "overhead cost variance" is the difference between your budgeted amount and actual costs incurred. Compare the amount you anticipated in your budgeted costs to the amount of the actual cost to calculate your variance. Variances may be over or under your estimates. You can then adjust pricing and profit margins based on the variance.

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