Overhead costs are businesses’ fixed expenses that are not directly related to the day-to-day running of the business. In other words, if you stop producing products today, you will still need to pay overhead costs to remain in business. This includes insurance, rent, utilities, and salaries. Overhead is a huge part of accounting because it outlines costs that companies cannot avoid by stopping or slowing down production. In addition, it allows you to establish the break-even point of the business to ensure you are not selling products at a loss.
Types of Overhead
There are two types of overhead, namely fixed overhead and variable overhead. Fixed overhead includes things like rent and business insurance. In short, these are costs that remain constant despite your sales. Variable overhead includes expenses related directly to production. This includes utility costs for running equipment and the cost of raw materials.
Property taxes, office suppliers, sales and marketing costs, and professional services like legal advice and accounting are under overhead costs. However, note that an investment such as renovating the company is not an overhead cost because it is a one-time expense.
How to Calculate Overhead Costs
Calculating your overhead expenses is straightforward. List down all the fixed costs, then add them all together to get the overhead. For instance:
Rent + insurance + utilities + administrative fees + licensing + marketing and advertising costs = overhead
How to Allocate Overhead Costs
Allocating overhead costs is when you break down your total overhead cost into a per-unit or per-hour basis. Here is the simple method for doing this.
(Rent + insurance + utilities + administrative fees + licensing + marketing and advertising costs) ÷ units or hours of production = overhead per unit
Calculating your overhead gives you a tangible number to work with and shows you how much your company has to make per unit to pay for fixed costs.
Since overhead costs cannot be ignored, you will have to cover them to keep running. And if you are looking for financing to cover these expenses, you can get in touch with 18 Sierra Financial. Call us, and we can assist you with the funding you need to keep providing your goods or services to consumers.