Overhead Cost Allocation Calculator
Spread fixed overheads across jobs, products or hours so every quote carries its fair share of rent, admin and insurance.
- Free, no sign-up
- Runs in your browser, nothing is stored
- Formula and worked example included
Overhead Allocation Calculator
Enter your figures to see results.
How much overhead should each job or product carry?
Rent, vans, insurance and the bookkeeper are not caused by any one job, but every job depends on them. Divide total overheads by your chargeable hours (or units) and you get an overhead rate (£96,000 over 6,400 chargeable hours is £15 an hour) that every quote must recover on top of labour and materials.
How to use this calculator
- Add up every cost that is not directly part of a job for the period.
- Choose the base that best explains why overheads arise (chargeable hours, units or direct cost) and enter the total for the period.
- Enter the hours or units one job uses to see the overhead it should carry.
What your result means
How to read the figure, what counts as normal, and what to do about it.
Why overheads have to be recovered somewhere
Every business has costs that no single job causes but every job depends on: the workshop rent, the van, the bookkeeper, the insurance. If quotes only cover materials and labour, those costs come straight out of profit. Overhead allocation spreads them across the work in a defensible way so that a price which looks profitable on the job sheet is still profitable at the year end.
It is also how you compare products or services fairly. Two lines with the same gross margin can have very different true profitability once one turns out to consume most of the admin, storage or machine time.
Choosing the allocation base
| Base | Best for | Weakness |
|---|---|---|
| Labour hours | Trades, agencies, workshops, anywhere people time drives cost | Penalises labour-heavy jobs that use little else |
| Machine hours | Manufacturing, printing, CNC | Needs machine time records |
| Units | A single product or very similar products | Unfair when products differ in complexity |
| Pounds of direct cost | Simple, when overheads track material spend | Expensive materials attract overhead they did not cause |
If one base clearly misrepresents some jobs, use two: for example a rate per labour hour for people-related overheads and a rate per machine hour for equipment-related ones. That is a light version of activity-based costing and is usually as far as a small business needs to go.
Chargeable hours, not paid hours
The commonest mistake is dividing overheads by the hours staff are paid for. Holidays, training, quoting, travel and slack time are not chargeable. A full-time employee is paid for about 1,950 hours a year but might be chargeable for 1,300–1,500. Using the larger figure gives a rate that is too low and a business that under-recovers its overheads on every single job.
Worked example: an electrical contractor
The firm's overheads (unit rent, vans, insurance, office manager, software, accountant) come to £96,000 a year. Its four electricians deliver 6,400 chargeable hours between them.
Overhead rate = 96,000 ÷ 6,400 = £15 per chargeable hour.
A rewire estimated at 24 hours should carry 24 × £15 = £360 of overhead on top of labour and materials. If the electricians are paid £22 an hour, the true hourly cost of the job is £37 before any profit, so a quoted labour rate of £35 an hour would lose money.
Frequently asked questions
What counts as overhead?
Any cost you would still incur next month if you did no work: rent, rates, insurance, utilities, admin and management salaries, software subscriptions, vehicle standing costs, depreciation, professional fees, marketing.
How often should I recalculate the rate?
At least annually when you set budgets, and again if overheads or capacity change materially: a new premises, a hire, or losing a member of staff.
What if I win more work than planned?
You over-recover: each job carries overhead that in total exceeds the real cost, so profit is higher than the job sheets suggest. Pleasant, but revisit the rate so that your quotes stay competitive.
Is this the same as absorption costing?
Yes. Absorption costing is the accounting term for including a share of fixed overheads in the cost of each unit or job. It is the basis UK accounting standards require for valuing manufactured stock.
The maths behind this calculator
For anyone who wants to check the working or rebuild it in a spreadsheet.
The formula
Overhead rate = Total overheads ÷ Total allocation base Overhead to allocate to a job = Job's use of the base × Overhead rate Fully loaded job cost = Direct materials + Direct labour + Allocated overhead
Assumptions and limits
- Overheads are fixed for the period and do not change with the volume of work. Semi-variable costs (fuel, consumables) are better treated as direct costs.
- The allocation base is forecast for the whole period; if actual hours or units come in lower, overheads are under-recovered and the rate should be raised for the next period.
- Rates are pre-profit. Add your target margin on top of the fully loaded cost.
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