Expenses are naturally occurring aspects in the business. And some expenses are classified as indirect expenses where they are not linked to the business product or even their services. These are called Overhead Costs.
These expenses are expenses that are ongoing and support your business in ensuring that things run smoothly, but are not directly related to the product that your business offers, or the services that your business does.
These are critical support expenses that are still necessary for the business to be able to do profit making activities. These overhead costs have a few similarities when it comes to other businesses, but some depend on the nature of the business.
These are some examples of Overhead Costs of businesses:
- Rent – Rent expenses are overhead costs. This expense would vary depending on the location and how big of a space the business is renting.
- Utilities – These expenses include light, water, and even internet and telephone fees.
- Insurance – Unexpectedly, insurance is actually part of the overhead costs of the business. This expense ensures that the business is prepared for any emergency that may be included in the insurance agreement.
- Office Supplies – These expenses ensure that the back office is well equipped to take care of the front of the business, whether the expenses are for simple things like pen and paper, this overhead expense should not be taken lightly.
- Travel – Travel expenses may include travels to and from suppliers, to and from banks, to and from anywhere business related that an employee or the business owner themselves go to.
- Salaries and Wages – this is perhaps one of the most important overhead expenses that a business has. This expense ensures that the business employees, or the people who are the reason why the business is actually running, are paid for the hard work and effort done for the business.
- Government fees and licenses – An essential part of launching, running, and maintaining a business are government fees, licenses, and even taxes. These overhead expenses takes care of just that, allowing the business to be run and to run smoothly
- Advertising Expenses – While arguably this is considered connected to the products and services of a business, this is an overhead expense that is always present in any business in any industry.
Overhead expenses are both fixed and variable expenses that the business pays monthly, quarterly, or annually. Every business must take into account its overhead expenses in order to be able to calculate the price for their actual products and services as these expenses are calculated into them.
Calculating Overhead Expenses
To calculate overhead expenses a business should divide the total overhead expense that the business spends in a month with its monthly sales. Take the quotient and multiply it by 100 and you will get the overhead rate.
The overhead rate calculates how much the business spends for every product that is sold or service that is rendered by the business.
Calculating the Overhead Allocation Rate
The Overhead Allocation Rate is calculated so that the business would know just how much it would need to allocate its funds for in order to make the product.
The formula for the overhead allocation rate is Total Overhead over total labor hours.
The quotient would then be the Overhead Allocation Rate that the business would need to allocate in order to produce the product. Using the Overhead allocation rate multiply by the number of labor hours needed to produce the said product.
A business owner should remember that the business monitors the overhead costs as it can actually have a hand in draining the funds that the business has. Overhead expenses can be a large share of the total expense and can become a burden to the business.
