Sales overhead refers to the indirect costs incurred in the day-to-day operations of a business that are not directly related to the production or sale of goods or services. These costs are essential for the functioning of the business but do not directly contribute to generating revenue. Understanding how to calculate sales overhead is crucial for businesses to assess their financial performance, set appropriate pricing strategies, and identify areas for cost optimization.
Key Facts
- Determine Overhead Costs:
- Make a comprehensive list of indirect business expenses that are not directly related to the production or sale of goods or services. These can include rent, utilities, insurance, advertising, office supplies, and other operating expenses.
- Exclude direct costs like raw materials and labor from the overhead costs.
- Calculate Total Overhead Costs:
- Add up all the monthly overhead costs to determine the aggregate overhead cost. This is the total amount of money needed to run your business.
- Calculate Overhead Percentage:
- To calculate the overhead percentage, divide the total overhead costs by the monthly sales revenue and multiply by 100. The formula is: (Overhead ÷ Monthly Sales) x 100 = Overhead Percentage.
- For example, if your monthly overhead costs are $120,000 and your monthly sales revenue is $800,000, the overhead percentage would be ($120,000 ÷ $800,000) x 100 = 15%.
By calculating the sales overhead, you can assess the proportion of your sales revenue that goes towards covering the indirect expenses of your business. This information can help you make informed decisions about pricing, budgeting, and improving efficiency.
Determine Overhead Costs
- Make a Comprehensive List
- Create a comprehensive list of indirect business expenses that are not directly related to the production or sale of goods or services.
- Examples include rent, utilities, insurance, advertising, office supplies, and other operating expenses.
- Exclude Direct Costs
- Exclude direct costs like raw materials, labor, and commissions from the overhead costs. These costs are directly related to the production and sale of goods or services.
Calculate Total Overhead Costs
- Add Up Monthly Costs
- Add up all the monthly overhead costs to determine the aggregate overhead cost.
- This represents the total amount of money needed to run the business.
Calculate Overhead Percentage
- Formula
- To calculate the overhead percentage, use the following formula:
(Overhead ÷ Monthly Sales) x 100 = Overhead Percentage
- Example
- If your monthly overhead costs are $120,000 and your monthly sales revenue is $800,000, the overhead percentage would be:
($120,000 ÷ $800,000) x 100 = 15%
By calculating the sales overhead, businesses can assess the proportion of their sales revenue that goes towards covering the indirect expenses of their business. This information can help businesses make informed decisions about pricing, budgeting, and improving efficiency.
References
- https://quickbooks.intuit.com/r/expenses/how-to-calculate-and-track-overhead-costs/
- https://www.freshbooks.com/hub/accounting/calculate-overhead-cost
- https://www.freshbooks.com/hub/accounting/overhead-cost
FAQs
What is sales overhead?
- Sales overhead refers to the indirect costs incurred in the day-to-day operations of a business that are not directly related to the production or sale of goods or services.
Why is it important to calculate sales overhead?
- Calculating sales overhead helps businesses assess their financial performance, set appropriate pricing strategies, and identify areas for cost optimization.
How do I determine my overhead costs?
- Create a comprehensive list of indirect business expenses, excluding direct costs like raw materials and labor.
How do I calculate the total overhead costs?
- Add up all the monthly overhead costs to determine the aggregate overhead cost.
What is the formula for calculating the overhead percentage?
- The formula is: (Overhead ÷ Monthly Sales) x 100 = Overhead Percentage
What does the overhead percentage represent?
- The overhead percentage represents the proportion of sales revenue that goes towards covering the indirect expenses of the business.
How can I use the overhead percentage?
- You can use the overhead percentage to assess the efficiency of your business operations and identify areas where costs can be reduced.
What are some common types of overhead costs?
- Common types of overhead costs include rent, utilities, insurance, advertising, office supplies, and other operating expenses.