Overhead Allocation
What is overhead allocation?
Overhead allocation is the practice of assigning shared overhead costs, such as rent, administration, and general software, to projects, clients, or service lines using a consistent driver, such as labor hours.
Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that applies the same allocation method each month, so margins by project and service can be compared fairly.
How to do it
- List overhead costs and choose one allocation driver
- Calculate an overhead rate by dividing total overhead by the driver, see overhead rate
- Apply the rate to each project and review the method each year
The figures below are illustrative. A firm has $60,000 of overhead and 6,000 labor hours, so its overhead rate is $10 per hour. A project using 200 hours is allocated $2,000.
Why it matters for service firms
Allocation shows whether a project covers its share of the firm's fixed costs, not just its direct costs. It supports better pricing and helps decide which services are truly profitable.
Frequently asked questions
What is the difference between overhead allocation and cost allocation?
Cost allocation is the broader practice of assigning any shared cost. Overhead allocation applies it specifically to indirect operating costs. Many firms use the terms almost interchangeably.
Which driver should a service firm use?
Labor hours are common because overhead mostly supports people. Revenue can work for simple firms. Choose the driver that best explains why costs rise, and apply it consistently.
Related terms and guides: cost allocation, overhead rate, indirect costs, and project profitability.