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?

A high overhead rate (>60-100%) suggests significant indirect costs relative to direct costs. This may indicate: opportunities for cost reduction, need to review allocation method accuracy, potential for automation to reduce labor, or need to increase production volume to spread fixed costs. Review your cost structure and consider process improvements.

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 fairly across jobs using industry-standard allocation methods. Make informed decisions with accurate cost allocation analysis.

How to Use This Calculator

1Enter Total Overhead: Input the total overhead costs you need to allocate (e.g., rent, utilities, insurance, administrative costs)
2Select Allocation Method: Choose the method that best reflects your actual cost drivers and business operations
3Add Your Jobs: Input data for each job including machine hours, labor hours, material costs, and floor space
4Calculate & Analyze: Review the allocation results, method comparison, and recommendations to optimize your costing strategy

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 (ft²)

Space occupied

Job #2