How Do You Calculate Overhead Costs With Examples

To calculate overhead costs, start by adding up all your indirect expenses such as rent, utilities, administrative salaries, and marketing to find your total overhead. Then, divide this total by an appropriate allocation base like total sales, direct labor costs, or labor hours. This gives you the overhead rate, which you can use to accurately assign overhead costs to your products or services.

Overhead Rate Formula: Overhead Rate = Total Indirect Costs / Allocation Base

This rate helps you understand how much overhead gets allocated per unit of the chosen base, simplifying pricing and cost control.

For ecommerce businesses, properly calculating overhead costs can mean the difference between sustainable growth and unexpected financial strain.

This comprehensive guide will walk you through everything you need to know about overhead cost calculation, from basic definitions to advanced formulas, real-world examples, and proven strategies to reduce these expenses while maintaining operational efficiency.

What Is Overhead Cost?

Definition of Overhead

Overhead costs are the ongoing business expenses that cannot be directly attributed to creating specific products or services. Unlike direct costs that fluctuate with production volume, overhead expenses remain relatively constant regardless of how much you produce or sell. These indirect costs are essential for keeping your business operational but don’t directly contribute to the creation of your products.

Understanding overhead costs is vital for accurate business analysis because they significantly impact your profitability, pricing strategies, and break-even calculations. Many business owners underestimate their true overhead expenses, leading to pricing products too low and eroding profit margins.

Overhead vs Direct Costs

The distinction between overhead and direct costs is fundamental to proper cost management:

Direct Costs	Overhead Costs
Materials and supplies used in production	Rent and utilities
Direct labor costs for manufacturing	Administrative salaries
Shipping costs per order	Insurance premiums
Product-specific packaging	Marketing and advertising
Commission per sale	Software subscriptions
Raw materials	Legal and accounting fees

Many business owners initially struggle with this classification, especially when it comes to employee wages or technology costs. The key is determining whether the expense directly relates to producing a specific unit of product or service. Misclassifying these costs can lead to inaccurate pricing, poor financial decisions, and reduced profitability.

Types of Overhead Costs

Understanding different types of overhead costs helps you better manage and predict your business expenses. Each type behaves differently as your business grows or contracts.

Overview of Corporate Cost Types

Cost Type	Meaning	Examples
Fixed Costs	Costs that stay the same regardless of production output or activity.	Rent, insurance, salaries, depreciation
Variable Costs	Costs that rise or fall in line with production levels.	Raw materials, direct labor, sales commissions
Semi-Variable Costs	Costs that include both fixed and variable elements.	Utilities, maintenance, cell phone bills
Direct Costs	Costs that can be clearly linked to a particular product or project.	Direct materials, direct labor, project-specific costs
Indirect Costs	Costs that cannot be directly assigned to a single product or project.	Factory overhead, admin salaries, building upkeep
Product Costs	Costs directly related to producing goods.	Materials, labor, manufacturing overhead
Period Costs	Costs tied to time periods rather than production.	Selling expenses, administrative costs, marketing expenses

Fixed Overhead

Fixed overhead costs remain constant regardless of your business activity level. These expenses provide stability in financial planning but can be challenging during slow periods:

• Rent or mortgage payments – Office, warehouse, or retail space costs
• Insurance premiums – Business liability, property, and workers’ compensation
• Fixed salaries – Administrative staff, managers, and core team members
• Loan payments – Equipment financing and business loans
• Annual licenses and permits – Business registration and regulatory fees
• Base utility charges – Minimum monthly fees for phone, internet, and utilities

Variable Overhead

Variable overhead expenses fluctuate with your business activity, increasing during busy periods and decreasing during slower times:

• Shipping and delivery costs
• Sales commissions and bonuses
• Office supplies and materials
• Travel and entertainment expenses
• Temporary staffing costs
• Processing fees for payments
• Marketing campaign costs

Semi-Variable Overhead

Semi-variable overhead costs combine fixed and variable components, creating a base cost that increases with activity. These expenses often have minimum charges plus usage-based fees:

• Utilities – Base connection fees plus usage charges
• Phone and internet – Monthly plans with overage charges
• Employee benefits – Base coverage plus performance bonuses
• Software subscriptions – Tiered pricing based on users or features
• Equipment leases – Fixed monthly payments with maintenance costs

Direct Costs

Direct costs are expenses that can be specifically traced to producing a particular product or service. They include costs like raw materials and wages paid to workers directly involved in manufacturing. These costs vary directly with the level of production.

• Direct materials – wood used in furniture, fabric used in clothing
• Direct labor – wages paid to workers who assemble products
• Project-specific expenses – special tools or equipment needed only for one project

Indirect Costs

Indirect costs are expenses that support production but cannot be directly linked to a specific product. Examples include factory rent, utilities, and salaries of supervisors. These costs are typically fixed or semi-fixed and are also known as overhead.

• Factory overhead – electricity, equipment depreciation
• Administrative salaries – office staff wages not linked to production
• Building maintenance – cleaning, repairs, and general upkeep

Product Costs

Product costs encompass all expenses incurred to create a product, including direct materials, direct labor, and manufacturing overhead. These costs are inventoried on the balance sheet and expensed as the cost of goods sold only when the product is sold.

• Materials – raw inputs like steel, plastic, or chemicals
• Labor – workers directly involved in production
• Manufacturing overhead – utilities, machine operation costs

Period Costs

Period costs are all other costs not tied to production and are expensed in the period incurred. They include selling, general, and administrative expenses such as marketing, office rent, and executive salaries.

• Selling expenses – advertising, sales commissions
• Administrative costs – office supplies, accounting fees
• Marketing expenses – promotional campaigns, digital ads

Other Types Of Overhead Cost

Administrative vs Production Overhead

For ecommerce and retail businesses, it’s helpful to categorize overhead into administrative and production-related expenses:

Administrative Overhead	Production Overhead
Office rent and utilities	Warehouse space
Administrative salaries	Equipment maintenance
Marketing and advertising	Quality control costs
Legal and accounting fees	Inventory storage
Office software and supplies	Packaging materials (bulk)
Business insurance	Safety and compliance costs

Why Overhead Cost Calculation Matters for Your Business

Profitability Impact

High overhead costs directly diminish your net profits by reducing the amount of revenue that flows to your bottom line. Every dollar spent on overhead requires additional sales to maintain the same profit level. Businesses with efficiently managed overhead costs enjoy competitive advantages through better pricing flexibility, higher profit margins, and increased resilience during economic downturns. Understanding your true overhead burden helps you make informed decisions about growth investments, staffing levels, and operational changes.

Pricing Strategy

Accurate overhead calculation is essential for sustainable pricing strategies. If you don’t account for all overhead costs when setting prices, you risk selling products below their true cost, eroding profitability over time.

For example, if your monthly overhead is $8,000 and you sell 400 units per month, each unit must absorb $20 in overhead costs ($8,000 ÷ 400 = $20). If your direct costs are $30 per unit and you want a 40% profit margin, your minimum selling price should be ($30 + $20) × 1.4 = $70 per unit.

Breakeven Analysis

Breakeven analysis determines how many units you must sell to cover all costs, and overhead calculation accuracy directly impacts this critical metric.

Breakeven Point Formula: Breakeven Units = Total Fixed Costs ÷ (Selling Price per Unit – Variable Cost per Unit)

If your fixed overhead is $10,000 monthly, selling price is $50, and variable costs are $25, you need to sell 400 units monthly to break even ($10,000 ÷ ($50 – $25) = 400 units). Understanding this calculation helps you set realistic sales targets and identify when your business becomes profitable.

How To Calculate Overhead Cost Step-by-Step

Identify All Overhead Expenses

Follow these steps to comprehensively identify your overhead expenses:

1. Review your chart of accounts – Go through each expense category systematically
2. Categorize fixed vs variable costs – Separate expenses that remain constant from those that fluctuate
3. Include indirect labor – Count administrative and support staff salaries
4. Account for facility costs – Include rent, utilities, maintenance, and insurance
5. List professional services – Add legal, accounting, and consulting fees
6. Include technology costs – Software subscriptions, hardware leasing, and IT support
7. Consider depreciation – Include equipment and asset depreciation
8. Add miscellaneous expenses – Office supplies, travel, and other indirect costs

Calculate Total Overhead for a Period

Use this formula to calculate your total overhead for any period:

Total Overhead = Fixed Overhead + Variable Overhead + Semi-Variable Overhead

For monthly calculations:

• Annual expenses ÷ 12 = Monthly overhead
• Weekly expenses × 4.33 = Monthly overhead
• Daily expenses × 30.44 = Monthly overhead

Example Calculation (with sample data)

Here’s a practical example for a Shopify store’s monthly overhead calculation:

Overhead Category	Monthly Cost
Office rent	$2,000
Utilities	$350
Insurance	$400
Shopify subscription	$79
Administrative salary	$4,000
Marketing tools	$200
Accounting software	$50
Internet and phone	$120
Professional services	$500
Office supplies	$150
Total Monthly Overhead	$7,849

This calculation shows the business has $7,849 in monthly overhead costs that must be covered regardless of sales volume.

Overhead Rate Formula

The overhead rate helps you understand overhead as a percentage of sales or other business metrics:

Overhead Rate = (Total Overhead ÷ Total Sales) × 100%

Using our example: If monthly sales are $25,000 and overhead is $7,849:
Overhead Rate = ($7,849 ÷ $25,000) × 100% = 31.4%

This means overhead represents 31.4% of total sales, which is within the typical range for small businesses (25-35%).

Alternative allocation bases:

• Overhead per labor hour = Total Overhead ÷ Total Labor Hours
• Overhead per machine hour = Total Overhead ÷ Total Machine Hours
• Overhead per square foot = Total Overhead ÷ Total Facility Square Footage

Per Unit/Per Order Calculation

Calculating overhead per unit or order helps with pricing decisions:

Overhead per Unit = Total Overhead ÷ Number of Units Produced
Overhead per Order = Total Overhead ÷ Number of Orders

Shopify Store Example:
Monthly overhead: $7,849
Monthly orders: 320
Overhead per order = $7,849 ÷ 320 = $24.53

This means each order must contribute at least $24.53 toward overhead costs. Combined with direct costs and desired profit margin, this helps establish minimum pricing thresholds.

Common Examples of Overhead Costs

Rent & Utilities

Physical space costs represent a significant portion of overhead for most businesses. These include monthly rent or mortgage payments for offices, warehouses, or retail locations, along with utilities like electricity, gas, water, internet, and phone services. Even home-based businesses should allocate a portion of home expenses as overhead.

• Office or warehouse rent: $1,500-$5,000+ monthly
• Utilities (electricity, water, gas): $200-$800 monthly
• Internet and phone services: $100-$300 monthly

Insurance & Taxes

Insurance protects your business from various risks, while taxes represent ongoing governmental obligations. Business liability insurance, property insurance, workers’ compensation, and professional liability coverage all contribute to overhead costs.

• General liability insurance: $400-$1,500 annually
• Property insurance: $500-$2,000 annually
• Professional liability: $800-$3,000 annually
• Business taxes and fees: Varies by location and revenue

Office/Admin Salaries

Administrative staff salaries, including management, accounting, customer service, and support roles, represent fixed overhead costs. These positions support overall business operations rather than direct production.

• Administrative assistant: $25,000-$45,000 annually
• Office manager: $35,000-$65,000 annually
• Customer service rep: $28,000-$50,000 annually

Marketing & Advertising

Marketing expenses that aren’t tied to specific sales fall under overhead. This includes brand advertising, content marketing, social media management, and general promotional activities.

• Social media advertising: $500-$3,000 monthly
• Content marketing tools: $50-$500 monthly
• Brand advertising campaigns: $1,000-$10,000+ monthly

Legal & Accounting Fees

Professional services for legal compliance, contract review, financial reporting, and tax preparation are necessary overhead expenses for most businesses.

• Monthly bookkeeping: $200-$800
• Annual tax preparation: $500-$3,000
• Legal consultation: $150-$500 per hour

Tech & Software (e.g., Shopify fees, subscription apps)

Technology infrastructure costs include ecommerce platform fees, software subscriptions, cloud storage, security tools, and productivity applications.

• Shopify monthly fees: $29-$299+
• Email marketing software: $20-$300 monthly
• Accounting software: $25-$180 monthly
• Project management tools: $10-$100 monthly

Maintenance & Repairs

Ongoing maintenance of equipment, facilities, and technology ensures smooth operations and represents predictable overhead expenses.

• Equipment servicing: $100-$500 monthly
• Facility maintenance: $200-$1,000 monthly
• IT support and updates: $150-$800 monthly

Overhead Cost Calculation Templates & Tools

Excel & Google Sheets Templates

Spreadsheet templates can automate overhead calculations and provide ongoing tracking capabilities:

• Monthly overhead tracker – Categorize and sum all overhead expenses
• Overhead rate calculator – Automatically calculate percentages and per-unit costs
• Budget vs actual comparison – Track performance against overhead budgets
• Trend analysis charts – Visualize overhead changes over time
• What-if scenarios – Model how changes affect total overhead

Key formulas to include:

=SUM(B2:B15) for total overhead calculation

=B16/$C$2*100 for overhead rate percentage

=B16/D2 for overhead per unit calculation

Shopify App Integration

Several Shopify apps can help automate overhead tracking and expense management. These tools integrate with your store data to provide real-time overhead calculations and insights.

• QuickBooks integration – Automatically sync expenses and generate overhead reports
• Receipt management apps – Capture and categorize overhead expenses
• Financial dashboard apps – Display overhead metrics alongside sales data
• Budget tracking apps – Monitor overhead spending against budgets
• Profitability analysis tools – Calculate true profit margins including overhead

Strategies for Managing Overhead Costs

Overhead costs can significantly impact a company’s profitability, so they must be carefully controlled without compromising quality or sales. The key to successful business management is making smart spending decisions that balance cost savings with operational effectiveness.

Regularly reviewing and analyzing overhead expenses is essential to optimizing efficiency. Managers should stay alert to rising costs and quickly assess the effects of any cost-cutting measures to avoid unintended harm.

Some practical and relatively low-risk ways to reduce overhead include:

• Negotiating Better Rates: Leverage long-term relationships with suppliers and service providers to secure improved pricing or terms. If viable, explore competitive alternatives to ensure you’re getting the best deal.
• Outsourcing or Insourcing: Depending on the business needs, consider outsourcing key functions such as IT support, payroll, accounting, or legal services to external experts, or alternatively, bringing these roles in-house if it proves more cost-effective.
• Streamlining Operations: Conduct thorough analyses to identify non-essential tasks and redundant expenses. Simplifying processes and eliminating unnecessary steps can lead to significant savings without impacting sales.
• Embracing Remote Work: Allowing employees to work from home can reduce costs related to office space, utilities, and equipment. Staff benefit from saved commuting time, while businesses can downsize their physical footprint.
• Leveraging Technology: Use automation tools and technology to handle routine tasks efficiently. While simple, repetitive jobs can be automated, complex decision-making typically still requires human oversight.

By implementing these strategies, businesses can keep overhead costs in check, improving their financial health and competitiveness.

Cutting and Managing Overhead Cost Effectively

Practical Cost-Reduction Strategies

Reducing overhead costs requires strategic thinking and careful implementation to avoid impacting business operations:

• Embrace remote work – Reduce office space requirements and utility costs
• Negotiate better rates – Renegotiate rent, insurance, and service contracts annually
• Automate routine tasks – Use software to reduce administrative labor needs
• Share resources – Consider co-working spaces or shared service providers
• Review subscriptions regularly – Cancel unused software and services
• Energy efficiency improvements – Reduce utility costs through better equipment and practices
• Outsource non-core functions – Use contractors instead of full-time staff for specialized tasks

Ecommerce-Specific Tips

Online businesses have unique opportunities for overhead reduction:

• Optimize shipping arrangements – Negotiate better rates with carriers
• Use cloud-based tools – Reduce IT infrastructure and maintenance costs
• Implement chatbots – Reduce customer service labor costs
• Dropshipping partnerships – Eliminate warehousing and inventory costs
• Multi-channel automation – Reduce manual order processing overhead
• Performance-based marketing – Shift from fixed advertising costs to commission-based models

Track and Analyze Overhead with Regular Reviews

Regular overhead analysis ensures costs remain under control and identifies optimization opportunities. Monthly reviews should compare actual expenses to budgets, analyze trends, and identify unusual variations. Quarterly reviews should assess the overhead rate against industry benchmarks and evaluate the effectiveness of cost-reduction initiatives.

Monthly review checklist:

• Compare actual vs budgeted overhead costs
• Calculate current overhead rate
• Identify largest expense categories
• Review new recurring expenses
• Assess cost-reduction initiative progress

Checklist for Overhead Management

•  Create comprehensive overhead expense list
•  Categorize expenses as fixed, variable, or semi-variable
•  Calculate monthly and annual overhead totals
•  Determine overhead rate as percentage of sales
•  Set overhead reduction targets (3-5% annually)
•  Review all recurring expenses quarterly
•  Negotiate service contracts annually
•  Monitor overhead trends monthly
•  Compare overhead rates to industry benchmarks
•  Update pricing to reflect true overhead costs

Value-Add Content Not Found Elsewhere

Real-World Case Study: Overhead Management for a Shopify Store

ABC Fitness Apparel, a Shopify store selling workout gear, successfully reduced overhead costs by 28% over 12 months through strategic management. Initially, their monthly overhead was $12,400 with sales of $35,000, creating an overhead rate of 35.4%.

Step-by-step transformation:

1. Audit phase (Month 1) – Identified all overhead expenses and categorized by necessity
2. Optimization phase (Months 2-6) – Implemented remote work, renegotiated services, automated customer service
3. Monitoring phase (Months 7-12) – Tracked progress and fine-tuned strategies

Category	Before	After	Savings
Office rent	$3,500	$0	$3,500
Utilities	$400	$150	$250
Software	$800	$420	$380
Administrative	$5,200	$3,600	$1,600
Professional services	$600	$400	$200
Total Monthly	$12,400	$8,930	$3,470

The result was a new overhead rate of 25.5% ($8,930 ÷ $35,000), improving profitability significantly while maintaining service quality.

Data Table: Industry Average Overhead Rates

Industry	Overhead Rate Range	Typical Rate
Retail/Ecommerce	20-35%	28%
SaaS/Technology	40-60%	50%
Manufacturing	15-25%	20%
Professional Services	45-65%	55%
Restaurants	30-40%	35%
Healthcare	35-50%	42%

Overhead Cost Benchmarks for Small Businesses

Small businesses typically maintain overhead costs between 25-40% of total revenue, with variations based on industry and business model. Service-based businesses generally have higher overhead rates due to labor intensity, while product-based businesses often achieve lower rates through economies of scale.

• Excellent overhead management: Under 25% of revenue
• Good overhead management: 25-30% of revenue
• Average overhead management: 30-35% of revenue
• Needs improvement: Above 35% of revenue

Overhead Costs FAQs

Conclusion

Understanding and calculating overhead costs is fundamental to building a profitable, sustainable business. By properly identifying, categorizing, and tracking these indirect expenses, you gain crucial insights into your true operational costs and can make informed decisions about pricing, budgeting, and growth strategies. Remember that overhead cost management is an ongoing process requiring regular review and optimization. 

The formulas and strategies outlined in this guide provide a solid foundation for controlling overhead costs while maintaining operational efficiency. Whether you’re just starting out or looking to optimize an established business, focusing on overhead cost calculation and management will significantly impact your bottom line and long-term success.

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