Entry and exit costs are common for every business. Talking about overhead costs, entrepreneurs are certainly familiar with what overhead costs are, costs that lead to ongoing operational expenses, but are not directly connected to the activity of making products or services.
You could say, overhead costs are expenses that must be calculated. The aim is to help guess budgeting needs as well as estimate the total costs needed to make a product or service. That way, the company can also gain profits from product sales.
What Are Overhead Costs?
Actually, what are overhead costs? As previously explained, overhead costs are the company’s overall costs to support business activities, but these costs are not related to the products or services offered.
Generally, companies are required to pay these costs continuously regardless of the scale of their business. So, this cost still has to be paid for small companies with lower total income or large companies with greater income.
For example, a company has a service base but still has a head office. In order to meet office needs, overhead costs will of course arise, such as costs for renting a building, purchasing equipment, maintenance, and insurance.
Not only that, there are also direct costs, such as employee salaries and equipment. All these costs do not have a direct impact on the quality of products or services, but still support the business.
All expenses included in overhead costs will be included in the company’s profit and loss report because they can directly affect the company’s profitability. So, calculating overhead costs will be a picture of the company to find out the total net profit.
Benefits of Overhead Costs
It is true, overhead cost calculations are not directly related to company income. However, business owners still have to calculate these costs because this type of cost has a significant influence on business success.
If there are expenses originating from overhead costs that are not calculated, it is not impossible that capital will be eroded. Over time, the business you are developing could actually stop halfway because you run out of capital.
On the other hand, if the company calculates overhead costs from the first time, the owner will know the size of the budget used. That way, it will be easier for the company to make policies or decisions.
Apart from that, it is also easier for business owners to determine the prices of products or services that will later be offered to customers and at the same time be able to make appropriate policies regarding resource allocation.
Example of Overhead Costs
Costs at each company may not be the same. However, generally overhead costs include expenses for the following things.
- Rental costs. Expenditure costs for use, for example warehouses, office buildings, or factories. If the company buys the property, the cost must be included in the depreciation budget.
- Administrative costs. These costs include wages for janitors, accountants, receptionists, and others, including employee payroll, entertainment costs, and audit fees.
- Utility. Costs for this aspect include costs for gas, water, electricity, telephone, internet and similar needs.
- Insurance. This budget aims to protect employees and companies from financial losses. The insurance provided can also vary, such as health insurance, property protection, education, and others.
- Promotion and sales costs. Expenditures aimed at promotional needs and product sales. For example, advertising costs, procurement of promotional materials, and sales salaries.
- Maintenance and service of vehicles and machines. Lastly, costs for servicing and maintaining machines and vehicles. This cost is an overhead requirement for companies operating in the delivery, vehicle rental or factory sectors.
How to Calculate Overhead Costs and Examples
So, you already know what overhead costs are and their benefits. Here is the formula you can use to calculate it:
- Overhead costs for each unit: Total Overhead Costs / Number of Units of Product or Service.
- Percentage of overhead costs for each category: (Category Overhead Costs / Total Category Overhead) x 100%.
- Overhead cost efficiency: (Total Overhead Costs / Employee Wages) x 100%.
Please note that companies can write down all overhead costs that have nothing to do with making products or services. Then, the total amount of the costs over a certain period of time, for example a monthly calculation or a one year period.
To better understand how to calculate overhead costs, try looking at the following example.
A shoe factory has monthly cost data as follows:
- Costs for raw materials: IDR 100 million.
- Costs for employee payroll (shoemaker): IDR 50 million.
- Overhead costs: IDR 30 million.
Number of shoes produced: 200 thousand pairs
Next, divide the total overhead costs by the number of products made in the same time period to get the overhead costs for each unit.
Overhead costs for each unit: Total Overhead Costs / Number of Units of Product or Service.
= Rp30.000.000 / 200.000
= Rp150,00.
You can also calculate the percentage of overhead costs for each category, you can use the formula:
Percentage of overhead costs for each category: (Category Overhead Costs / Total Category Overhead) x 100%
For example, the cost to rent a factory is IDR 20 million per month, then the percentage is:
= (Rp20.000.000 / Rp30.000.000) x 100%
= 66,67%
Based on these data, overhead cost efficiency figures are obtained using the formula:
Overhead cost efficiency: (Total Overhead Costs / Employee Wages) x 100%
= (Rp30.000.000 / Rp50.000.000) x 100%
= 60%.
Knowing the influence of overhead costs on business continuity, make sure you don’t forget to calculate them, OK! Apart from that, so that business operational activities continue to run optimally, you can use the help of the Labamu application.
This application offers many features that can support your business, starting from Cashier POS, Managing Raw Materials, to Creating Reports. Come on, use Labamu!
