Steps to Calculate Overhead Cost Per Unit

When a customer goes to market and wants to buy anything, he asks the prices of different brand
product. Only that product whose price is less than any other will be bought by him. Why does it
happen? Answer is simple, that company has tried best to reduce it overhead cost or indirect
expenses cost. So, its prices have also become low than other company. So, all those companies
who to reduce prices, should try to reduce overhead cost by calculating overhead cost per unit. In
following content, we are given simple steps of calculating overhead cost per unit.


1st Step : To Collect the Overhead Cost

For calculating overhead cost per unit, you need to collect all overhead cost data. In overhead
cost, we include mainly salary of staff who either do office work or supervision work or
accounting work, Internet bill, mobile bill, rent, advocate fees and taxes.


2nd Step : To Calculate Total Salary of indirect labor

Indirect labor and employees are those who help direct labor to do production. So, we can
calculate indirect labor with following way :

Suppose, we 10 employees who works 300 working days in a year. We can calculate total
working hours of indirect labor in a year

10 labor working hrs in a week = 10 X 300 X 8 ( hrs in a day ) = 24000 hours

suppose salary of per hour is = Rs. 10

10 labor's salary in a year = Rs. 10 X 24000 = Rs. 2,40,000

3rd Step : Calculate Other Overhead Cost

Like indirect labor overhead yearly cost, we can also calculate other overhead yearly cost.
Suppose, we have to calculate Internet bill in a year.

Suppose, we have to pay Rs. 500 per month, so, we have to pay Rs. 6000 in year. There may be
many other basis of calculating overhead cost in a year.

Determine average hourly wage. Each employee's contribution should be classified as either
direct or indirect labor. Direct labor works directly with product, whereas indirect labor supports
direct labor, i.e., accounting or other corporate functions. You are only interested in salaried
direct labor and indirect labor.

4th Step : Calculate the Total of All Overhead Costs in a year

For example, I am making list

Indirect labor cost = Rs. 240000
Internet Bill = Rs. 6000
Rent = Rs. 12000
Others = Rs. 1,00,000
-----------------------------------
Total overhead cost = Rs. 358000

5th Step : Calculate total Unit Sold or produced Per Year

Suppose, we have sold or produced 2,00,000 units in a year.

6th Step : Calculate Overhead Cost Per Unit

Divide total overhead costs by number of units in a year. It will be overhead cost per unit.

Overhead Cost per Unit = 358000/200000 = Rs. 1.79 per unit
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