Which allocation method should I use?

Choose based on your primary cost drivers: Machine Hours for capital-intensive operations with heavy equipment usage; Labor Hours for labor-intensive operations where workforce varies significantly; Material Cost when overhead correlates with material handling, storage, and procurement; Floor Space for facility-driven costs like rent, utilities, and property taxes; Equal Split for simple operations with similar job characteristics. The best method reflects how your overhead costs are actually incurred.

What is overhead allocation and why is it important?

Overhead allocation is the process of distributing indirect costs (rent, utilities, insurance, administrative expenses) across products or jobs. It's crucial for accurate product costing, pricing decisions, profitability analysis, and cost control. Without proper allocation, you may underprice some products and overprice others, leading to poor business decisions.

How do I calculate my total overhead costs?

Total overhead includes all indirect costs: facility costs (rent, utilities, property taxes), equipment depreciation, insurance, maintenance, administrative salaries, office supplies, and other shared expenses. Exclude direct materials and direct labor. Add up all these costs for your chosen period (monthly, quarterly, or annually).

Can I mix different allocation methods?

For consistency and comparability, use one method per accounting period and review annually. While you can use different methods for different cost pools (e.g., facility costs by floor space, equipment costs by machine hours), this requires more complex accounting. Start with a single method that best represents your overall cost structure.

What if my overhead rate is very high?

An overhead rate that is high relative to your direct costs means indirect costs are a large share of the modeled total. In this tool, higher percentages are a signal to review your inputs, allocation choices, and overall cost structure. Compare the calculated rate with your historical data and business context before deciding whether to adjust costs, utilization, or pricing.

How often should I review my overhead allocation?

Review your allocation method at least annually, or when there are significant changes in operations, equipment, facility size, or business model. Update your actual overhead costs monthly or quarterly to ensure accurate product costing and pricing decisions.

Overhead Allocator Calculator

Distribute overhead costs across jobs using common allocation methods.

Allocation Tool: Results depend on method choice. Different methods suit different operations. Review with your accounting standards and cost structure.

Input Parameters

Total Overhead (USD)*

Total overhead costs to be allocated across all jobs

Allocation Method*

Choose the method that best reflects your cost drivers

About Machine Hours

Allocates overhead based on the proportion of machine hours used by each job.

Best For:

Capital-intensive manufacturing with automated equipment

Caution:

Ensure accurate machine hour tracking for all jobs

Jobs to Allocate

2 job(s)

Job #1

Job Name*

Machine Hours

Total machine time

Labor Hours

Total labor time

Material Cost (USD)

Direct material costs

Floor Space (ft^2)

Space occupied

Job #2