Calculating the overhead rate and percentage of a business essentially includes dividing the organization’s indirect expenses by direct expenses. As soon as a company figures out their overhead costs, it makes it easier for them to decide the prices for their products and services. This is necessary because it leads to a reduction in the prices of their products and services and allows them to stay competitive. The whole purpose of determining the overhead rate and percentage of expenses is eventually to decide the appropriate cost of products.
In order to calculate the overhead rate and percentage for small surveying businesses, there are few steps that companies can follow.
Step 1 – Calculate the Sum of the Direct and Indirect Expenses
This is the primary step to find out the overhead rate in any company no matter their size. In order to calculate the direct expenses, align the cost of direct labor and direct material that is required to manufacture the products or services that the company offers. For example, if a company sells mobile phones, the cost of materials and labor directly paid to the workforce and everything else that is involved in the manufacturing will be included in the direct expenses. Direct expenses are directly proportional to the number of products manufactured each year. However, for indirect expenses, align all of the costs that are indirectly involved with the manufacturing of the products such as the sales and customer services department, taxes, marketing, administrative expenses, insurance, etc.
Step 2 – Calculate the Overhead Rate
Once you have calculated the direct and indirect expenses of your company, the next step is to divide the sum of all direct expenses with that of all indirect expenses. The answer is the overhead rate.
Step 3 – Calculate the Overhead Percentage
Once you have calculated the overhead rate of a small surveying business, next, you shall multiply the overhead rate with 100 to determine the overhead percentage.
How Often are Overhead Rate and Overhead Expenses Ideally Calculated for Small Surveying Businesses?
Usually, the overhead rate and percentage are calculated yearly. However, in a small surveying business, the overhead rate and percentage are calculated each month in order to evaluate the expenses and cost for each month as the company is in its premature stage and the frequent calculation and evaluation lead the company to revise and analyze the cost and expenses.
Why is it Important to Determine the Overhead Rate and Expenses?
Determining the overhead rate and percentage is a very important thing for all kinds of businesses. This allows the management of any business to initiate sensible operations. The rate allows the company to keep track of the profit margin by contrasting the expenses with the cost. The rate also lets the company predict its profitability for the upcoming months and year. The company shall ideally have an overhead expense and cost that will significantly include a slight margin of the profit. Once a company calculates the overhead rate and percentage, it comprehends the effect of overhead on various costs involved in a business and also helps the company to decide what role the rate plays in the prices of their product. It is advised for companies to review their overhead costs bi-monthly, monthly and on a quarterly basis by doing a regular bookkeeping.
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