Overhead allocation assigns shared business costs to jobs for planning. It does not turn those costs into cash payments on each job, and it does not guarantee that actual sales will recover the budget.
Start with a cost pool: list the expenses you intend to recover, the period they cover and which are already included elsewhere. This example uses 6,000 per month of office, software and shared operating costs. It excludes the direct labour and materials already charged to jobs.
Choose an allocation base
A base is the activity used to distribute the pool. Billable labour hours may suit labour-intensive services. Machine hours may be more relevant for equipment-heavy work. A flat amount per job works poorly when jobs vary greatly in size.
You do not need to claim that the chosen base measures every cost perfectly. State why it is a useful planning approximation and apply it consistently.
Calculate the rate
Assume 400 realistically billable hours per month:
Overhead per billable hour = 6,000 ÷ 400 = 15
A six-hour job receives 90. Add that to the separately estimated direct costs before calculating your target margin. See the service pricing guide for the complete sequence.
Test under-recovery
If only 300 hours are sold, the 15 rate recovers 4,500, leaving 1,500 unrecovered. Dividing the pool by 300 instead gives 20 per hour, but changing future prices does not retroactively collect the earlier shortfall.
| Billable hours sold | Recovery at 15/hour | Difference from 6,000 budget |
|---|---|---|
| 300 | 4,500 | −1,500 |
| 400 | 6,000 | 0 |
| 450 | 6,750 | +750 |
The final row is not automatically an extra 750 of profit: actual overhead or other expenses may have changed. Compare the budget with the actual ledger.
Avoid the two common duplicates
First, check the labour rate. If it already includes office overhead, remove that portion before adding the same pool separately. Second, when calculating monthly break-even using variable contribution, subtract the fixed pool once rather than including it in both per-job cost and fixed costs.
If owner time is included as a planning labour cost, document that convention. Do not also insert the same allowance into overhead. Its accounting treatment may differ from this management calculation.
Review the estimate after delivery
Record estimated hours, actual hours, estimated material use and actual purchases separately. A job can miss its margin because of an estimating error, a purchasing variance, low company-wide utilisation or an unpriced scope change. Those problems need different responses.
Business Queensland notes that cost-based pricing may allocate fixed costs to units. The hourly example here is an original application of that principle, not a prescribed allocation method. Cost-based pricing reference.
Continue with labour cost and billable hours or enter a job in the job-costing worksheet.
About the examples and sources
The figures are hypothetical teaching examples created for AskToBot, not surveyed prices or recommended industry margins. The linked references explain the underlying concepts; they do not supply or endorse these example figures. The arithmetic is checked against the stated assumptions. This is AI-assisted educational content and has not been independently reviewed by an accountant. Read how we check calculations.
Sources & references
- Pricing products and services — Business Queensland
