Overhead, overhead cost or overhead expense refers to all current expenditure incurred by a business in order to operate a business. This is also known as Operating Expenditure like rent, gas, electricity, wages etc. The term overhead is generally used in group expenses which are important for the ongoing performance of the business, but it cannot be immediately linked with the products or services being offered. As for example, overhead do not generate profit directly. This article will tell you how to calculate overheads.
Overhead expenditure is the total costs on the income statement excluding direct materials, direct labor & direct expenses. Overhead expenses contain accounting fees, advertising, depreciation, rent, insurance, interest, legal fees, repairs, supplies, taxes, telephone bills, travel and utilities expenses.
Overhead can be categorized under four headings:
- Functional classification
- Classification on the nature of expenditure
- Element-wise classification
- Classification on behavior of expenditure
The word ‘overhead’ when mentioned, is generally linked with business. Families and individuals have overhead costs also. A family’s overhead costs or an individual’s overhead costs are in fact more expansive than a business’s overheads. For personal overhead, items like entertainment costs, credit card costs are taken. Your personal overhead costs are those costs which you pay on a monthly basis and do not differ in a significant amount. If you know your monthly overhead then it can help you in setting a budget for yourself or your family which will be based upon how much income you carry in monthly when compared with your monthly overhead. In this article you will learn how to calculate your overheads easily.
Steps to calculate overhead
- Find out what your monthly average gas bills and electricity bills are. These can be in different bills or in one combined bill. Add up the entire amount you have paid for gas bills and electricity in the last one year. Divide the total amount of these bills by 12 (number of months per year). You will get the average electric and gas bill per month.
- Compute your average monthly water bill in the same method in which you have calculated your average monthly gas and electric bills in step one. It will be better to calculate an average over 12 months for the utilities as the costs differ from month to month.
- Collect your credit card bills for the previous year for those credit cards on which you owe money. Sum up the total amount you have paid every month for all of your cards. Divide this amount you have obtained now by 12. From this you will have your monthly average credit card expenditure.
- Compute your known fixed cost like car payments, day care costs, rent payments and automobile gas expense for duration of one month. This expenditure is your known monthly expenditure.
- Fix a budget for expenditure. For example, set your budget for your grocery purchases, and your entertainment expenses. This will be your expected monthly budgeted expenditure.
- Sum up together your average monthly gas and electric bills, your average monthly water bill, your known monthly expenditure, your average monthly credit card cost and your monthly budgeted expenses. This total expenditure is your personal or your family’s overhead costs which needs to be considered in your budgeting on a monthly basis when you are determining your own or your family’s monthly budget.
Tips and warnings
- The simplest method to decrease your monthly overhead is to decrease your food, gas or entertainment cost. These are those items on which you have more control over than your utility, rent and credit card bills.
- If you are using overhead for a personal or family budget then it is safer to overestimate your overhead than what the actual figure is. Underestimating your monthly overhead will result in your family spending more money on purchasing those things that are not important than your budget can pay for.
This is how you can compute your overhead. I hope this article would have proved useful to you.
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