When running a business, every expense and income must be recorded carefully so that cash flow runs smoothly. Well, talking about expenses, one of the components in it is overhead costs. Here’s the explanation of the overhead cost and how to calculate it.
Understanding Overhead Costs
Overhead costs are additional expenses that are not directly related to the business process or production carried out by company. For example, a manufacturing company whose main task is to manage raw materials to become finished products ready for sale, then examples of overhead costs are tax collections, employee insurance, rental rates, stationery equipment, and salaries of security guards.
In addition to the examples above, unexpected expenses such as machine theft are also included in overhead costs. In accounting activities, overhead costs should not be excluded and must be included in the business budget. The goal is for business processes to run smoothly.
Overhead Calculating Function
Financial records have an important role for the continuity of a business. Likewise, calculating overhead costs can also have its own impact on financial flows. From here it is then explained that the function of overhead costs is :
Monitoring Expenses
By recording overhead costs regularly the company can monitor the amount of costs incurred. Furthermore, business actors can see whether the budget planning that has been prepared has been running efficiently or not.
Help Allocating Budget
On the other hand the cost overhead report is a tool to compare whether the funds expended is greater than the expense of other. If so, then the entrepreneur can make adjustments to the budget for overhead costs for the next period while minimizing expenses so as not to over budget .
Overhead Cost Classification
Overhead costs are divided into 3 types, namely fixed, variable, and semi-variable overhead costs. Well, to make it easier to make financial reports, let’s first find out the difference between each of these types.
Fixed Overhead Cost
At this first point, the nature of overhead costs is fixed and generally incurred on a regular basis. So, regardless of the decrease or increase in sales volume and profits, the nominal fixed overhead costs are the same or do not change. There are some examples such as:
- Rental Costs
- Labor salary
- Legal fees
- Employee health insurance
Variable Overhead Cost
Contrary to the first point, variable overhead costs tend to change over time. The nominal changes can be caused by the country’s economic conditions, promotional efforts, or even the change of seasons. The example is:
- Overtime expense
- Office stationery budget
- The cost of advertising as a marketing tool
Semi-variable Overhead Cost
This last category is more flexible. At one time the fee must be paid regularly with a fluctuating nominal, sometimes the payment is also unscheduled. The examples of semi-variable overhead costs are:
- Printer ink or paper costs
- Phone rates
- Water and electricity costs
Example of Factory Overhead Costs
In order for you to better understand what overhead costs are, below are some examples of factory overhead costs, including:
- Electric/Water/Telephone
Bills such as electricity, water, and telephone are included in examples of factory overhead costs. Yes, it is true. Electricity, water and telephone bills are included in the mixed variable cost. Even the business activity is 0, the company is still obliged to pay the three bills. And as activity increases, the bill goes up too. - Insurance Costs
The next example of factory overhead costs is insurance costs, be it employee insurance such or company asset insurance. Insurance costs are included in fixed overhead costs, because the amount usually does not change. - Office Supplies
The next example of overhead costs is office supplies, including stationery, photocopiers, printers, chairs, tables, air fresheners, and various other knick-knacks. Office supplies are classified as overhead costs because they are not directly related to production, as described in the above definition of overhead costs. - Marketing Costs Marketing
Costs such as installing banners, printing pamphlets, listing exhibitions, advertising on Google Ads or Facebook Ads, are overhead costs. Although it has a big impact on profit, marketing costs do not have to be classified as overhead costs, because they are not directly related to production. - Commissions / Bonuses
The fifth point example of overhead costs is commissions, bonuses, incentives, and all kinds of rewards given by the company to employees. The costs for this kind of bonus are included in variable overhead costs, because the amount does not change. - Cost of Special Activities
Every company must have activities outside of daily operations, such as employee training, seminars, CSR, industrial visits, and so on. Costs for such special activities are included in variable overhead costs. - Depreciation The last
Example of factory overhead costs is depreciation, namely the depreciation of assets or assets due to age. In accounting theory, assets need to be treated pragmatically by reducing their value every month. This kind of deduction in the value of assets in the report can also be referred to as overhead costs.
How to Calculate Overhead Cost
How to calculate overhead costs are as follows:
Splitting Overhead Costs
Before starting to calculate overhead costs, first separate which expenses include direct costs and which include overhead costs. After that you can categorize overhead costs according to their classification so that the financial statements are easier to read.
Calculating Overhead Cost Percentage
The second process is to find the percentage of overhead costs per category compared to the overall overhead costs. For example, calculating the percentage of overhead costs for monthly labor, the formula for finding the percentage of overhead costs is:
Monthly labor cost / Monthly overhead cost x 100%
Finding the Value of Overhead Cost Efficiency
To find out the efficiency of overhead costs, you can compare them with incoming resources and income. The formula is to divide the overall overhead costs by labor wages and multiply by 100%.
Meanwhile, to calculate the efficiency of overhead costs using income, the formula is the same, only replaced in the part of labor wages into income received.
Calculating overhead costs is one way to monitor monthly budget planning to be more efficient and not over budget. Therefore, don’t skip this one process while making financial reports, okay?
