OVERHEAD COST CALCULATIONS
What the heck is this overhead stuff? Well, it’s a bit of a catch-all and includes the ongoing operating costs of running a business. The term overhead is usually used to group expenses that are necessary to the continued functioning of the business but that do not directly generate profits.
Overhead expenses are all costs on the income statement except for direct labor and direct materials. Overhead expenses include accounting, advertising, depreciation, indirect labor, insurance, interest, legal fees, rent, repairs, supplies, taxes, telephone, travel and utilities.
Questions to be answered: How big is your studio in sft? Use the following equation to determine heating/electric bills:
Total area of studio divide by total area of building (if studio is in your house) = _____%
Multiply your electric bill by that percentage to figure the proportion of the electric/heat bill that belongs to your work space. Now divide the proportioned electric bill by the number of hours in the month to get a $/hour for electric/heat./lights. (FYI: 30days = 720hours, 31days = 744 hours)
Let’s say your studio is 20% of the area covered by the electric/heat cost and your bill came to $450 for the month (yes, I know these costs are constantly going up…all the more reason to do the calculation regularly!) 20% of $450 = $90, divided by a 30 day month = $0.125/hour.
OK, that’s the first of the Overhead considerations. There are also all the other costs mentioned previously which should be fairly direct and divided over a year and by the hour if you like. So stay off the phone and don’t go anywhere and this cost will be kept lower, right?
Usually accountants use a % of cost factor when adding this in as a cost. Normal overhead is between 15 – 25% of the total cost, but this percentage changes by industry.
More to come…
Part 1 is Here:
Part 2 is Here: