How To Add Overhead Costs to Different Types of Products

When running a handmade business, you may have a variety of products and a wide range of prices. Simply dividing overhead expenses evenly among the products you make in a month, or the number of products you sell, can make some items overpriced. 

Here’s how to take your overhead costs and distribute them among your different products using a weighted average. 

 

When you might use a weighted average

If all the products you make have similar production costs, you may simply distribute your overhead costs evenly among each product.

However, if your production costs range from $5 per item to $150 per item and you have $500 of overhead expenses to spread among each product’s price, you don’t want to add the same amount to the $5 item as the $150 item. 

Evenly distributing overhead expenses among products that have a significant price differences will likely make the lower priced item overpriced. 

I make a variety of vinyl travel bags and they range from small zipper pouches to large travel totes. 

If my zipper pouch’s production cost is $3 and my travel tote’s production cost is $35, and each product’s price needs to absorb $10 of overhead expenses, that bumps up the price of my zipper pouch too much.

But if I use a weighted average to determine the percent of my total overhead costs each product should absorb, based on its production cost, I can distribute my overhead costs in a more logical way. 

Step 1 – Determine Your Numbers

Before you can determine how much money to divvy up among your products, you must know a couple of numbers:

A) Overhead costs (expenses + wages)

B) How many products you can make in a month

A) Overhead costs

To keep things simple, I think of overhead costs as expenses and wages I must cover outside of Production Costs (wages and materials to make a product). 

There are overhead costs that will be a known number to your business (e.g. the price of your yearly business license) and there will be overhead costs that you won’t know (e.g. Etsy fees, which are based on your retail price and how much you list and sell). 

Unknown overhead costs (such as Etsy fees, craft show fees, unexpected sewing machine repairs, etc.) can be covered in your markup (as explained in my full pricing guide).

For this step, we’ll work with known overhead costs.

 

Overhead Wages

Determine how many hours you have to spend working on your business each month, outside of production hours. 

For example, if I have 28 hours to work on my business in a month (7 hours per week), and half of them are spent on production, the other half will be spent on overhead tasks (e.g. marketing, packaging orders, replying to emails, etc.).

So I’m spending approximately 14 hours on overhead tasks per month. 

Multiply those hours by your hourly wage. 

For example, if I want to pay myself $15/hour and I’m spending 14/month on overhead tasks, I have $210 in overhead wages to cover.

 

Overhead Expenses

Consider the things you spend money on for your business. 

There will be yearly fees (e.g. a business license), which can be divided by 12 to find your monthly cost, and there will be things you must spend money on every month. 

Examples of overhead expenses for a handmade business are:

• • Business licenses & permits (divide yearly costs by 12 to get your cost per month)
  • Photography or craft show props (again, divide by 12 for your monthly fee as you likely don’t need to buy new equipment or props every month)
  • Advertising fees
  • Shipping materials
  • Office supplies
  • Membership fees
  • Gas or mileage
  • Etc.

Add up all your expenses to estimate your average monthly overhead expenses.

Just like your overhead hours, you can set a budget if you’re not sure how much you’ll spend. 

If you only have $200 to spend each month an $100 goes toward product materials, that leaves $100 to spend on overhead expenses.

Let’s say I have $50 in overhead expenses to cover each month.

 

Total Overhead Costs

Add your overhead expenses to your overhead wages to get your total overhead costs you must cover each month.

For example: $50 (overhead expenses) + $210 (overhead wages) = $260 (total overhead costs)

On average, I must cover $260 of monthly overhead costs through my products’ prices.

 

B) Number of Products

Based on the number of hours you have to work on your business each month, how many of those hours are spent on production, and how long it takes you to make each product, determine how many of each item you can make each month. 

For example, if I have 14 hours to work on production, I may be able to make:

• • 8 travel totes
  • 10 cosmetic bags
  • 15 zipper pouches

You may make even amounts of each of your products or you may make significantly more of one item over another. 

This should be factored into how much overhead cost one type of product absorbs over another. 

For example, if you spend 80% of your production hours making one type of product, and 80% of your sales come from that product, then the majority of time/money you spend on creating listings, packaging and shipping orders, etc. is caused by that one product. 

That popular product is creating the majority of overhead costs, so its price should absorb more overhead costs.

 

Step 2 – Calculate Each Product’s Total Production Costs

First, you must look at how many different products you have and the percentage each item’s production cost contributes to the total production cost of your product line.

Take the production cost per item (materials + labor), for each type of product you make, and multiply that cost by the quantity you make of that product each month.

For example:

Product #1 – Travel Tote

• • Production cost per tote = $35
  • Quantity made per month (on average) = 8
  • $35 x 8 = $280 (total monthly production cost)

Product #2 – Cosmetic Bag

• • Production costs per bag = $15
  • Quantity made per month (on average) = 10
  • $15 x 10 = $150 (total monthly production cost)

Product #3 – Zipper Pouch

• • Production costs per pouch = $3
  • Quantity made per month (on average) = 15
  • $3 x 15 = $45 (total monthly production cost)

 

Step 3 – Calculate Overhead costs PER PRODUCT TYPE

Now we must find the percent each product should absorb of overhead costs, based on each item’s total monthly production cost.

To find the percent:

1. Add all of your products’ monthly production costs together to find the total monthly production costs of your entire product line. 
2. Use that total to find the percentage of each product’s production cost by cross-multiplying and dividing.

For example:

1. 1. $280 (travel tote) + $150 (cosmetic bag) + $45 (zipper pouch) = $475
   2. I want to know what percent $280 (travel tote’s total monthly production cost) is of $475 (total production costs), so I would cross multiply and divide:

$280            (I want to know this %) 

$475                     100(%)

• • 280 x 100 = 28000
  • 28000 divided by 475 = 58.95%

I would repeat this step for each of my products to determine each item’s percentage.

• • Travel tote = 58.95%
  • Cosmetic bag = 31.58%
  • Zipper pouch = 9.47%

*Double check that you’ve done this correctly by adding each percentage together and ensure it equals 100% (e.g. 58.95% + 31.58% + 9.47% = 100%)

Now you can determine how much each type of product should absorb of your total Overhead Costs. 

Multiply your total overhead costs by a product’s production cost percent.

For example:

I have an average of $260 in overhead costs to cover each month 

 

Product #1 – Travel tote should absorb 58.95% of monthly overhead costs

$260 (total overhead costs) x 58.95% = $153.27

 

Product #2 – Cosmetic Bag should absorb 31.58% of monthly overhead costs

$260 (total overhead costs) x 31.58% = $82.11

 

Product #3 – Zipper Pouch should absorb 9.47% of monthly overhead costs

$260 (total overhead costs) x 9.47% = $24.62

 

*Double check your math by adding together each product’s total and ensuring it equals your total overhead costs (e.g. $153.27 + $82.11 + $24.62 = $260)

 

Step 4 – Calculate Overhead Cost PER ITEM

Now you can use each product’s quantity (how much you’ll make of each type of product per month (on average)) to find your overhead cost per item.

Divide each product’s overhead total cost per month by the quantity.

For example:

Product #1 – Travel Tote

$153.27 (total overhead cost) divided by 8 (quantity made) = $19.16

Overhead cost per Travel Tote = $19.16

 

Product #2 – Cosmetic Bag

$82.11 (total overhead cost) divided by 10 (quantity made) = $8.21

Overhead cost per Cosmetic Bag = $8.21

 

Product #3 – Zipper Pouch

$24.62 (total overhead cost) divided by 15 (quantity made) = $1.64

Overhead cost per Zipper Pouch = $1.64

 

 

Step 5 – Calculate Total Cost Per Item

The final step is to add your production cost per item to your overhead cost per item to get your total cost per item.

 

For example:

Product #1 – Travel Tote

$35 (production cost per tote) + $19.16 (overhead cost per tote) = $54.16 (total cost per tote)

 

Product #2 – Cosmetic Bag

$15 (production cost per bag) + $8.21 (overhead cost per bag) = $23.21 (total cost per bag)

 

Product #3 – Zipper Pouch

$3 (production cost per pouch) + $1.64 (overhead cost per pouch) = $4.64 (total cost per pouch)

 

Once you have your total cost per item, you can finish pricing your items to include markup.

Please follow the steps in this article to complete your pricing: The Right Way to Price a Handmade Product (Step-by-Step Formula)

 

Comparison: Weighted Average vs. Non Weighted Average

Let’s take a quick look at what my total costs per item would be if I simply took my total overhead costs per month and divided it by the total number of products I make per month.

In total, I make 33 items per month (8 totes, 10 cosmetic bags, 15 zipper pouches).

I have $260 in overhead costs to cover.

260 divided by 33 = $7.88

Spreading my overhead costs evenly among each item I make would leave me with the following total costs per product:

Product #1 – Travel Tote

$35 (production cost per tote) + $7.88 (overhead cost per tote) = $42.88

(compared to $54.16 using a weighted average)

 

Product #2 – Cosmetic Bag

$15 (production cost per bag) + $7.88 (overhead cost per bag) = $22.88

(compared to $23.21 using a weighted average)

 

Product #3 – Zipper Pouch

$3 (production cost per pouch) + $7.88 (overhead cost per pouch) = $10.88

(compared to $4.64 using a weighted average)

 

You can see how distributing overhead expenses evenly among all my products will lead to my lowest priced item (zipper pouch) being overpriced, in comparison to my other products. 

 

I hope this article helps you work your overhead costs into your products’ prices.