How To Calculate Overhead Cost Per Unit

In the world of business, consumers and clients will always want to buy the product or service that has most benefit (e.g., quality, features, etc.) and that has the lowest cost. Thus, you can say that price is a very crucial factor from the perspective of the consumer. It is likewise a very significant factor from the point of view of the business operation itself. If you can catch up with the least price of an equivalent product on the market and at the same time minimize the cost of producing that product, you will earn cost savings. Such savings can serve many useful purposes for your company. For example, you can further lower the price of your own product (and in the process pass the savings on to your own clients), acquire better raw materials, raise the salaries of your personnel, offer higher returns to your investors, pay your debts much faster, and so on.

In the world of business, reducing cost without compromising product or service quality is always a worthwhile task. If you want to do that, you will need to calculate the overhead cost per unit, among other things. This article describes how you can calculate overhead cost per unit.

  • Identify your overhead expenses or overhead cost. This refers to all the expenses required for producing a product or service. Generally, such expenses involve costs for materials, labor, and the like. They also involve expenses integral to the production or delivery of a service; for example: utilities, telephone bills, taxes, rent, accounting, interest, depreciation, and legal fees. Overhead cost is usually seen as any fixed cost; that is, cost that does not change when the output changes.
  • Calculate the average wage per hour. The workforce in your company can be classified into two broad types of labor: direct or indirect. Both are important to the success of your company. Direct labor employees are those in contact with the product or are directly working in the production or delivery of products or services. Indirect labor employees are the supporting employees, as they do not have direct contact in the production itself but are instrumental in making sure that production goes smoothly. Examples of indirect labor employees are those performing corporate function or accounting functions.
  • Find out how many work days there are in a particular calendar year. This means you subtract the number of non-working days (including holidays) from 365 (i.e., the total number of days in a year). Multiply the total work days by the number of hours that your workers work per day. This is usually 8. The result is the total labor hours for that particular year.
  • Calculate the total cost of labor for that year by multiplying the total labor hours and the average wage per hour. The result is your overhead cost for labor.
  • Determine the average number of units that you've sold per month. Multiply this number by 12 to get the total average number of units sold yearly.
  • Add the overhead expenses and the overhead cost for labor; this is your total overhead cost. And, finally, divide the sum by the average number of units sold yearly. The result is the overhead cost per unit.

The computations involve only basic mathematical operations, yet the result of the computations can actually help you make wise business decisions.


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