Overhead allocation: charging costs to the jobs that caused them

Most small businesses know their gross margin by job and their overhead in total, and never connect the two. Every job shows a healthy margin, the overhead sits in one lump at the bottom, and somehow the year is thinner than the job margins implied.

The gap is that overhead is caused by jobs — some far more than others — and until it is charged to them, the jobs consuming the most support look identical to the ones consuming none.

Pick a driver that reflects cause

Allocation means spreading shared costs across jobs using some measure of how much each one used. The measure is the whole decision.

Revenue is the most common choice and usually the worst, because it assumes a large job consumes support in proportion to its price, which is rarely true. Better drivers are the thing that actually runs out: direct labour hours, machine hours, square footage, or vehicle days.

Build one overhead rate and use it

You do not need a costing system. Take annual overhead, divide by the annual total of your driver, and you have a rate.

$420,000 of overhead across 12,000 direct labour hours is $35 an hour. Every job now carries $35 for each direct hour it consumes, alongside its direct costs. That single number is enough to change quoting, job selection, and your sense of which work is actually worth having.

Where it changes what you quote

A job estimated at $26,000 of direct cost and quoted at $34,000 looks like a 24% margin. If it consumes 410 hours, it also carries $14,350 of overhead — and it is a loss.

This is the single most common way a busy business loses money: quoting off direct cost plus a markup that was set years ago and no longer covers the overhead the work actually creates. Everyone is working flat out, every job shows a gross margin, and the year still disappoints.

Keep it simple and honest about its limits

One rate across the business is enough for most small companies. Two or three, if you have genuinely different operations — a workshop rate and a field rate, say — is as far as it is usually worth going.

And remember what allocation is and is not. It is a management tool for understanding and quoting, not a statement of fact: the overhead exists whether or not you take the job. Which is why it does not override contribution margin for a short-term decision about filling idle capacity. Use allocated cost to set your standard prices, and contribution margin to decide whether one marginal job is worth taking today.