Overhead allocation calculator

If your company charges by the hour or day, you need to include an element for overhead costs when you calculate the billable rates. What’s the best way to allocate the overheads across your billable staff?

three methods

There isn’t a right or wrong allocation method. It’s really what works best for your company. You may find it helpful to model the allocation using each of the methods in our Overhead Allocation Calculator to get a feel for which is the most appropriate for your business.

The three methods we have chosen are: (1) headcount; (2) billable hours worked; and (3) salary.

Whichever one you use, be sure to exclude the full cost of employing billable staff from overheads so that you avoid double counting.

Headcount

Only include billable staff in the headcount. This can include admin staff if they have a chargeout rate and their time can be billed to individual customers.

Remember to adjust the headcount to full-time equivalents if you employ part-time billable staff.

Don’t include very senior staff who are “nominally” billable, if they are really not going to charge time to customers.

There are some drawbacks in using this method, for example, overheads carried by the most senior staff will be the same as for junior staff. This may be inappropriate if more of the overhead can be traced to senior staff, for example business development travel costs.

Billable hours

Instead of allocating overheads pro rata to headcount, sometimes they are allocated pro rata to billable hours worked. This method has the advantage of loading overheads onto those expected to spend more of their available time on billable work. These are usually the more junior members of staff who will be less concerned with general management and business development.

Salary cost

This sheet allocates overheads pro rata to salary cost of each billable member of staff. A variant of this is to use the total staff cost per person, including employers’ NI, car allowances, pensions, etc., as well as salary.

Again, you will need to make an adjustment for part-time staff by grossing up the salary to the full-time equivalent.

This method spreads more of the overhead to senior members of staff, and so deals with the drawback of the headcount method. However, one of the drawbacks is that senior salaries might be so high in comparison to junior salaries that the overheads borne by senior staff with this method may be commercially unrealistic.