How to Calculate Overhead

Step-by-Step Guide

1. 1

   Step 1: Understand that overhead costs are expenses that do not directly relate to your product.

   They are also known as indirect costs.
   
   Indirect costs are things like rent, administrative staff, repairs, machinery, and marketing costs that are essential to your business operations and must be paid regularly.
   
   In our example, indirect costs such as postal rates and insurance are necessary to run a business, but not making a product. , These costs will fluctuate based on demand for your product and the market price of materials.
   
   If you are starting a bakery, direct costs would be labor wages and ingredients.
   
   If you are running a health clinic, they would be your doctors' salaries, stethoscopes, etc.
   
   The most frequent direct costs, as illustrated above, are wages and materials.
   
   In simplified terms, direct costs pay for the things on the assembly line, while indirect costs pay for actual assembly line. , While you can choose any time frame you'd like, most businesses break down their expense reports by month.
   
   Be consistent with your time-frame
   -- if you calculate indirect costs monthly, you must calculate direct costs monthly too.
   
   Using computer programs like QuickBooks, Excel, or Freshbooks can help you keep your list organized and accessible.
   
   Don't worry just yet about what expense goes where.
   
   You need the full picture of your expenses before you can calculate overhead. , All companies have inevitable expenses that include taxes, rent, insurance, licensing fees, utilities, accounting and legal teams, administrative staff, facility upkeep, etc.
   
   Leave no stone unturned! Look over expense reports and receipts from the past to make sure you aren't missing anything.
   
   Don't forget about recurring expenses, such as renewing a license or filing permits, that occur infrequently.
   
   They still count as overhead. , If you are a new or aspiring businessperson, you'll need to do thorough research on the costs of supplies, labor and potential overhead.
   
   If you have old accounting books, you can use those to plan for next year's costs.
   
   Unless you are making large changes to your business plan, they are often similar numbers.
   
   Average your old costs over 3-4 months to adjust for any statistical anomalies. , Every business is different and you may make a judgement call on certain expenses.
   
   For example, while legal expenses are generally overhead costs, they directly contribute to production if you run a law firm.
   
   If you are still confused, think of overhead costs as those you would pay if you stopped producing anything at all.
   
   What keeps your business running every day? Update this list every time you incur new expenses. , This is the amount of money that you need to stay in business.
   
   In the example above, our yearly overhead would be $16,800.
   
   Knowing this number is crucial when creating a business plan.
2. 2

   Step 2: Know that direct cost is the cost of creating a good or service.

3. 3

   Step 3: Make a list of every expense for one month

4. 4

   Step 4: quarter

5. 5

   Step 5: or year.

6. 6

   Step 6: Account for common overhead (indirect) costs.

7. 7

   Step 7: Use old costs or estimates if you don't know your exact expenses yet.

8. 8

   Step 8: Divide your list into direct and indirect costs based on your business model.

9. 9

   Step 9: Add all of the indirect costs together to get your total overhead costs.

Detailed Guide

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