When a customer goes to market and wants to buy anything, he asks the prices of different brand product. Only that product whose price is less than any other will be bought by him. Why does it happen? Answer is simple, that company has tried best to reduce it overhead cost or indirect expenses cost. So, its prices have also become low than other company. So, all those companies who to reduce prices, should try to reduce overhead cost by calculating overhead cost per unit. In following content, we are given simple steps of calculating overhead cost per unit.
1st Step : To Collect the Overhead Cost
For calculating overhead cost per unit, you need to collect all overhead cost data. In overhead cost, we include mainly salary of staff who either do office work or supervision work or accounting work, Internet bill, mobile bill, rent, advocate fees and taxes.
2nd Step : To Calculate Total Salary of indirect labor
Indirect labor and employees are those who help direct labor to do production. So, we can calculate indirect labor with following way :
Suppose, we 10 employees who works 300 working days in a year. We can calculate total working hours of indirect labor in a year
10 labor working hrs in a week = 10 X 300 X 8 ( hrs in a day ) = 24000 hours
suppose salary of per hour is = Rs. 10
10 labor's salary in a year = Rs. 10 X 24000 = Rs. 2,40,000
3rd Step : Calculate Other Overhead Cost
Like indirect labor overhead yearly cost, we can also calculate other overhead yearly cost. Suppose, we have to calculate Internet bill in a year.
Suppose, we have to pay Rs. 500 per month, so, we have to pay Rs. 6000 in year. There may be many other basis of calculating overhead cost in a year.
Determine average hourly wage. Each employee's contribution should be classified as either direct or indirect labor. Direct labor works directly with product, whereas indirect labor supports direct labor, i.e., accounting or other corporate functions. You are only interested in salaried direct labor and indirect labor.
4th Step : Calculate the Total of All Overhead Costs in a year
For example, I am making list
Indirect labor cost = Rs. 240000
Internet Bill = Rs. 6000
Rent = Rs. 12000
Others = Rs. 1,00,000
Total overhead cost = Rs. 358000
Suppose, we have sold or produced 2,00,000 units in a year.
6th Step : Calculate Overhead Cost Per Unit
Divide total overhead costs by number of units in a year. It will be overhead cost per unit.
Overhead Cost per Unit = 358000/200000 = Rs. 1.79 per unit