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Click Here for a printable version.
Overhead by Definition
Everything that you buy, rent, lease or employ, with which you further
the growth or operation of your business, becomes over-head. All Overhead
costs must be documented and recorded for verification owhen and if needed
by tax departments and for accurately establishing your annual to daily
overhead basis. |
Overhead |
The definition of overhead really spells out what a person must record. Many
business operators do not take the time to record all their expenses accurately; therefore,
when they establish an hourly overhead figure, it is incorrect because it is not complete.
They are using that hourly overhead figure for the year and not recapturing a full cost of
operating the business. When this occurs, the difference in loss is made up from the loss
of some of the profits...
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When you operate a individual business, you are not really alone in the venture.
You are sharing the venture with a group of silent partners who share your optimism for
success with you by offering you the use of store space, supplies and utilities. They,
along with all of the many different items and services we must buy for the business
operation, make up overhead. Naturally, we want to keep them paidup to date so that we
may keep using their ervices, and to do that we msut structure our hourly charges to
include our wates and also our houtly overhead costs. Together they form our hourly
'shop charge'.
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To establish the hourl overhead charge we must first determine the total
hours we work per year. Upholsterer Stacey works eight hours a day at the bench, five
days a week, fifty-two weeks a year. A total of 2080 wrking hours. Stacey's records
show his expenses for the year were $45,000. Expense figures are always one year behind
and inflation averages a 5% per year increase. So in fact, a person should add $2250.
(5%) to the $45,000 annual overhead figure. Dividing the $47,250 total by Stacey's 2080
working hours establishes his overhead at $22.72 each hour.
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Now that upholsterer Stacey has established his hourly overhead cost at
$22.72 per hour, he must include this amount with his labor charge. Combined, they
will form his hourly shop cost. Isay 'cost' because no margin of profit has entered
the picture. Only your wages and your hourly expense is being returend to you. At
this point not even the cost of your staples, cotton or tackstrips is being returned
to you. Raw supplies can addup to many dollars on a sofa or chair and need to be
recorded an charged. Your supply house will not give you free supplies, why
should you?
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When you are recording overhead charges and supplies, take care that you
do not interchange the two as one. Supplies remain supplies and to recover your cost
for the supplies, you must charge each job for the supplies you used on that job. If
this is not done, the cost of the supplies will be taken from your margin or earnings.
This situation follows the same pattern as when you are trying to recover your
overhead costs. It may appear petty but at the end of the month, materials cost can
be quite high. Row materials prices have skyrocketed in the last several years and
with all new burlap and all new jute webbing base on a sofa, you have a tidy sum which
the customers should pay for. This applies also to staples, tacks, etc!
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Calculating Inflation...Again & Again |
Let's not underscore the fact that you need to update your pricing each
year to keep your business afloat. The cost of living continues to rise and as it
does, your expenses that are used to calculate your overhead will also rise each and
every year.
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