How to Calculate your Overhead Rate

Have you ever contemplated the true cost of a sale for your business?

A good way to do that is to calculate your overhead costs.

Let’s say you provide computer repair services.  Think about all the costs of providing your repair services.  You have your time, and the mileage costs to get you to the customer, and the cost of whatever part or equipment they need installed or replaced.  But what about your overhead costs?

What is overhead you ask?

Overhead is all the costs of doing business that are not directly associated with your product or service. Some examples of overhead costs would be:

  1. Rent
  2. Administrative/office personnel payroll
  3. Utilities
  4. Advertising
  5. Accounting / Legal costs
  6. IT Services
  7. Supplies

Let’s dissect the costs for the computer repair service company.

 

First, there’s the direct costs of providing the service, then there’s the indirect costs, or overhead.

Direct Costs:

  1. Direct Labor – you and/or employees who directly work on the computers
  2. Direct Materials – the parts/equipment you hook up/replace
  3. Freight – travel costs you incur getting to/from the customer

Indirect Costs:

  1. Rent of your storefront/office space
  2. Heat/electric/phone/internet for your store/office
  3. Payroll for any office personnel
  4. Advertising costs
  5. Accounting/legal costs
  6. Dues/subscriptions to trade publications/organizations

 

To figure out your Overhead Rate, you add up all your Overhead costs – estimated – for a year.  Let’s say they add up to $100,000.

Next, estimate the total number of labor hours available to work.  If you are the only worker, and you work 40 hours a week for 50 weeks a year, that’s 2000 hours.

 

Take your total Overhead Costs divided by your total Labor Hours to get your Overhead Rate.

In the example here, that would be $100,000 / 2,000 hours = $50 per hour.  If you have one employee besides yourself who works the same 40 hours for 50 weeks a year, you would add your 2000 hours/year and the employee’s 2000 hours per year to get the total Labor Hours.  The calculation would be $100,000 / 4,000 hours = $25 per hour.

 

Let’s say you send your employee to a customer’s place of business to install a computer and get it working.

You have Direct Costs:

Costs of Computer $600
Labor Costs $  50  1 employee for 2 hours at $20/hour + benefits
Travel $  20  40 mile round trip at $0.50/mile
Total Direct Costs $670

 

And you have Overhead:

2 hours at $25/hour $  50
TOTAL COST OF SERVICE $720

 

 

Add the Direct Costs and the Overhead to get your Total Cost of Service.

 

Now, make sure your billing rate is more than your cost and you will make a profit.

 

The important thing to remember about your Overhead Rate is that costs change.  Prices go up.   Try to keep your costs stable.  It’s also a good idea to periodically recalculate your Overhead Rate to make sure you are charging enough to cover your costs and earn a profit.

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