How to Calculate Company Overhead

Company Overhead Calculator

Use this calculator to determine your total company overhead and overhead rates relative to direct costs and revenue. Input your indirect expenses and relevant financial figures below.

Overhead Cost Components (e.g., Monthly or Annually)

Base Figures for Rate Calculation (e.g., Monthly or Annually)

Calculation Results:

Total Overhead:

Overhead Rate vs. Direct Costs:

Overhead Rate vs. Direct Costs:

Overhead Rate vs. Revenue:

Overhead Rate vs. Revenue:

Understanding and Calculating Company Overhead

Company overhead refers to the ongoing administrative and operational expenses of a business that are not directly associated with producing a product or service. These are the costs required to keep your business running, regardless of whether you're making sales or not. Understanding and accurately calculating your overhead is crucial for effective financial management, pricing strategies, and overall business profitability.

What is Company Overhead?

In simple terms, overhead costs are indirect costs. Unlike direct costs (like raw materials or direct labor for a specific product), overhead costs cannot be directly traced to a specific product, project, or service. They are essential for the business's existence and operation but don't directly contribute to the creation of revenue-generating items.

Examples of common overhead costs include:

• Rent or lease payments for office space, factory, or retail store
• Utilities (electricity, water, gas, internet)
• Administrative salaries (e.g., HR, accounting, executive staff not directly involved in production)
• Insurance (general liability, property insurance)
• Office supplies and equipment
• Marketing and advertising expenses
• Depreciation of assets
• Legal and accounting fees
• Maintenance and repairs for facilities
• Software subscriptions and IT support

Types of Overhead Costs

Overhead costs can generally be categorized in a few ways:

1. Fixed Overhead: These costs remain relatively constant regardless of the level of production or sales. Examples include rent, insurance premiums, and administrative salaries.
2. Variable Overhead: These costs fluctuate with the level of business activity. While still indirect, they might increase or decrease with production volume. Examples could include certain utility costs (if production uses more electricity), shipping costs (if not directly charged to the customer), or indirect materials.
3. Semi-Variable Overhead: These costs have both a fixed and a variable component. For instance, a utility bill might have a fixed service charge plus a variable charge based on usage.

Beyond fixed and variable, overhead can also be classified by function:

• Administrative Overhead: Costs related to the general management and administration of the company (e.g., executive salaries, office supplies, legal fees).
• Selling Overhead: Costs associated with marketing, selling, and distributing products or services (e.g., advertising, sales commissions, delivery expenses).
• Manufacturing Overhead: Indirect costs incurred in the production process (e.g., factory rent, utilities for the factory, indirect labor, depreciation of factory equipment).

Why is Calculating Overhead Important?

Knowing your company's overhead is vital for several reasons:

• Accurate Pricing: To set competitive yet profitable prices for your products or services, you must cover both your direct costs and a portion of your overhead.
• Profitability Analysis: Understanding overhead helps you assess your true profit margins and identify areas where costs might be too high.
• Budgeting and Forecasting: Overhead figures are a cornerstone of financial planning, allowing you to create realistic budgets and forecast future expenses.
• Cost Control: By tracking overhead, businesses can identify inefficiencies and implement strategies to reduce unnecessary expenses.
• Break-Even Analysis: Overhead is a key component in determining the sales volume needed to cover all costs and start making a profit.

How to Calculate Company Overhead

The basic steps to calculate company overhead involve identifying and summing all indirect costs for a specific period (e.g., a month, a quarter, or a year). Once you have the total overhead, you can then calculate an overhead rate, which expresses overhead as a percentage of a base figure, such as direct costs or total revenue.

1. Calculate Total Overhead:

Sum all your indirect expenses for the chosen period:

Total Overhead = Rent + Utilities + Insurance + Administrative Salaries + Marketing + Office Supplies + Depreciation + Other Indirect Costs

2. Calculate Overhead Rate:

The overhead rate helps you understand how much overhead you incur for every dollar of direct costs or revenue. There are two common ways to calculate this:

• Overhead Rate vs. Direct Costs: This shows how much overhead you spend for every dollar of direct costs (e.g., Cost of Goods Sold).

  Overhead Rate (%) = (Total Overhead / Total Direct Costs) × 100

• Overhead Rate vs. Revenue: This indicates what percentage of your total revenue is consumed by overhead costs.

  Overhead Rate (%) = (Total Overhead / Total Revenue) × 100

Using the Company Overhead Calculator

Our calculator simplifies this process. Simply input your various indirect costs for a consistent period (e.g., all monthly costs or all annual costs). Then, provide your total direct costs and total revenue for the same period. The calculator will instantly provide you with:

• Total Overhead: The sum of all your indirect expenses.
• Overhead Rate vs. Direct Costs: Your overhead as a percentage of your direct costs.
• Overhead Rate vs. Revenue: Your overhead as a percentage of your total revenue.

Example Calculation:

Let's say a small business has the following monthly expenses:

• Rent: $2,000
• Utilities: $500
• Insurance: $200
• Administrative Salaries: $4,000
• Marketing & Advertising: $1,000
• Office Supplies: $300
• Depreciation: $100
• Other Indirect Costs: $400
• Total Direct Costs (COGS): $15,000
• Total Revenue: $25,000

Using the calculator:

Total Overhead: $2,000 + $500 + $200 + $4,000 + $1,000 + $300 + $100 + $400 = $8,500

Overhead Rate vs. Direct Costs: ($8,500 / $15,000) × 100 = 56.67%

Overhead Rate vs. Revenue: ($8,500 / $25,000) × 100 = 34.00%

This means for every dollar of direct costs, the company incurs about 56.67 cents in overhead. Also, 34% of its total revenue goes towards covering overhead expenses.

Interpreting Your Overhead Rates

A high overhead rate might indicate inefficiencies or excessive spending on indirect costs, potentially squeezing profit margins. A very low rate might suggest underinvestment in crucial areas like marketing or administration, which could hinder growth. Benchmarking your overhead rates against industry averages can provide valuable insights into your company's operational efficiency.

Strategies to Reduce Overhead

If your overhead rates are higher than desired, consider these strategies:

• Negotiate Better Deals: Review contracts for rent, utilities, insurance, and suppliers regularly.
• Optimize Space: Consider downsizing office space, implementing remote work policies, or using co-working spaces.
• Energy Efficiency: Invest in energy-saving equipment and practices to reduce utility bills.
• Automate Processes: Use technology to automate administrative tasks, reducing the need for manual labor.
• Review Subscriptions: Cancel unused software or service subscriptions.
• Outsource Non-Core Functions: Consider outsourcing HR, accounting, or IT to reduce administrative salary and benefit costs.
• Control Marketing Spend: Analyze the ROI of your marketing efforts and cut back on underperforming campaigns.

By regularly monitoring and managing your company's overhead, you can ensure a healthier bottom line and more sustainable business growth.