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RD, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 8784
Experience:  MBA, CPA
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# How do I calculate an overhead rate and how do I apply that ...

### Resolved Question:

How do I calculate an overhead rate and how do I apply that rate for determining profit/loss?
Submitted: 8 years ago.
Category: Finance
Expert:  RD replied 8 years ago.

Why do youneed the overhead rate? Do you want to allocate the overhead costs to different departments and determine the Profit and loss of each department?

Normally, overhead rate can be calculated by dividing overhead (indirect) costs -- for example, rent and utilities -- by direct costs -- for example, labor or number of machine hours or such other criterion. So for eg. If your overhead costs are \$30,000 and direct costs are \$60,000, your overhead rate is .50.

So you would allocate the overhead cost of the entity to the various departments based on the above overhead rate and determine the profit and loss for each department or segment.

At entity level P&L - all overhead costs will be deducted to determine net P&L for the entity.

Let me know if you have any question.

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.

Customer: replied 8 years ago.
Reply to RD's Post: Here's my scenario: we're a roofing company. We get a job, the owners guess what we should charge based upon the materials we'll buy and the wages we'll pay. I have to figure, after we get paid, whether or not the job was profitable or we at least broke even. So if I total up the expenses for materials, other directly identifiable expenses for that job, and the wages paid (including WC & liabilty associated with the wages and the associated employer's employment taxes)do I multiply that total by the overhead factor to arrive at the job cost? When I compare that number to the revenue received for the job (I know this is backwards), should I have the P&L for the job?
Expert:  RD replied 8 years ago.

Direct cost will be-

Materials used for the job

Labor cost (including payroll tax and wcomp liab) for the job

Other expenses such as permits or other costs directly related to that particular job.

the office rent, if any

the equipment rental ( if the same equipment is used for various jobs)

interest paid

Any other expenses you incur in business(not included in direct costs above)

A percentage of the overhead cost needs to be added to the direct cost as calculated above in order to determine your total cost for the job.

In order to arrive at the overhead cost rate- you can determine overhead rate based on the prior month total overhead cost divided by the direct cost. And for this job you can allocate the overhead based on the percentage so calculated on the direct cost incurred for the job.

This will give you the total costs incurred for the job.

You can have a P&L for each job if you want to evaluate each job separately.

Let me know if you have any question.

Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.