What Is the Meaning of Overhead Cost?

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Accounting costs are considered an overhead cost.
Accounting costs are considered an overhead cost. (Image: Jupiterimages/Comstock/Getty Images)

Overhead costs are those that small business, large corporations and all operating establishments in between cannot avoid. Business owners find it beneficial to divide and insert a portion of the overhead into each client project to cover the costs of operation. Alternatively, businesses hire an accountant to calculate and distribute overhead costs.

Description

Overhead costs are not directly a result of a specific job or client project but are necessary for business operation. For example, in a construction business, the cost of vehicle insurance for the company truck is one type of overhead cost. These costs are separate from gig-specific costs and a portion of the monthly overhead is inserted into each job or is absorbed by the company itself.

Examples of Overhead

The indirect overhead costs businesses face include advertising prices, accounting costs, depreciation, supplies, office space or warehouse rent, supplies necessary for business or office upkeep, receptionist and janitorial payroll, travel expenses and utilities. Other examples of overhead are local, state and federal taxes, if applicable, interest on business loans for equipment, labor costs and any necessary legal fees for contract preparation or retaining counsel.

Calculating Overhead

Calculate the average hourly wage by adding all hourly wages and dividing by the number of direct labor employees. Count the approximate number of working days for the year excluding holidays, vacation days, weekends and the granting of personal days. Multiply the average direct labor hourly wage by an 8-hour, or longer, workday and multiply that total by the number of working days for the year. Do not include non-billable hours such as breaks, lunch and meetings and calculate those hours in a separate equation. The non-billable hours are overhead costs while the billable hours are direct labor specific to each client project and are included directly in the price of the job. Multiply the non-billable hours by the average hourly wage. Divide the non-billable total by the billable total to find the overhead ratio. Use the ratio to calculate how much more money per hour is needed to cover the overhead costs. For example, if the calculated ration is 150 percent, multiply every $1 by 150 percent to figure the necessary addition. For every $1, add $1.50 to the total hourly cost to the client.

Reducing Overhead

Outsourcing accounting representatives is one method of reducing overhead costs. Another option common to small businesses is to cut down on utilities by having an in-home office and using only a cellphone to field customer contacts. Although the use of a cell phone may deter from productivity on the job while attending to potential customer needs, an effective crew of direct laborers can compensate.

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