Overhead cost per unit is your overhead for a period divided by the units you make in that period: overhead per unit = total overhead ÷ units. Overhead is everything it costs to run the business that doesn't belong to any one product, like rent, utilities, insurance, software, repairs, bookkeeping and marketing. The simple formula treats every unit alike, which is fine if you make one product. Once you make several, and some take far more kitchen time than others, spreading overhead by the hours each product uses gives a truer cost. In the example below, a kitchen with $2,400 of overhead a month makes three products; spread by units, every one carries $1.09, but spread by kitchen hours, a pack of kūlolo carries $2.00 and a bag of chips 75 cents, and kūlolo's margin drops from 41% to 30%. Below is what counts as overhead, both methods worked through, why the rate moves with volume, and a free calculator.
The short version
- Overhead per unit = overhead for the month ÷ units made in the month.
- Overhead is the cost of running the business, not of making any one product: rent, utilities, insurance, software.
- Yearly bills go in at a twelfth a month, so the rate doesn't jump the month insurance is due.
- With several products, spread overhead by what drives it, usually kitchen hours, not by units.
- Fixed overhead per unit falls as volume rises, so set the rate from the volume you plan.
- Don't count your own wage twice: if your time is in labor, it isn't overhead too.
- TaroStack gets the rest of the cost exact, batch by batch, so overhead is the only estimate left. More below.
What counts as overhead
| Overhead, a month | Amount |
|---|---|
| Kitchen rent | $1,200 |
| Utilities | $260 |
| Insurance, $1,440 a year ÷ 12 | $120 |
| Software and website | $110 |
| Equipment repairs and wear | $180 |
| Bookkeeping | $150 |
| Marketing | $230 |
| Delivery van, its share | $150 |
| Total | $2,400 |
What isn't overhead: ingredients, packaging and the labor of making a product, because each of those belongs to a unit you can point at. Those are direct costs, and they go in the product's cost on their own lines. The test is simple: if you made one more unit, would this cost go up? Ingredients would; rent wouldn't.
Method 1: every unit alike
Windward Roots, the made-up taro business I use in these examples, makes three products in a rented kitchen:
| Product | Units a month | Kitchen hours a month |
|---|---|---|
| Kūlolo, pack | 600 | 40 |
| Taro chips, bag | 1,200 | 30 |
| Lilikoi butter, jar | 400 | 10 |
| All products | 2,200 | 80 |
Spread by units, overhead per unit is $2,400 ÷ 2,200 = $1.09, on every pack, bag and jar alike. It's quick, and it's right for a business that makes one product, or several that take about the same time to make.
Method 2: by kitchen hours
Spread by hours, overhead is $2,400 ÷ 80 hours = $30 an hour of kitchen time. Each product then carries the hours it uses:
| Product | Kitchen hours | Overhead | ÷ units | Overhead per unit |
|---|---|---|---|---|
| Kūlolo | 40 | $1,200 | 600 | $2.00 |
| Taro chips | 30 | $900 | 1,200 | $0.75 |
| Lilikoi butter | 10 | $300 | 400 | $0.75 |
Kūlolo takes half the kitchen's hours and makes a quarter of its units, so it should carry half the overhead. Spreading by units hid that.
What the choice does to each product's margin
| Product | Materials and packaging | Labor | Price | Full cost, by units | Margin | Full cost, by hours | Margin |
|---|---|---|---|---|---|---|---|
| Kūlolo | $2.19 | $1.43 | $8.00 | $4.71 | 41.1% | $5.62 | 29.8% |
| Taro chips | $0.82 | $0.38 | $4.00 | $2.29 | 42.8% | $1.95 | 51.3% |
| Lilikoi butter | $2.60 | $0.90 | $9.00 | $4.59 | 49.0% | $4.25 | 52.8% |
By units, the three products look much alike. By hours, kūlolo is the weakest of the three and chips are much better than they looked. That changes decisions: which product to push at the market, which to raise in price, and which to make more of when the kitchen is full. The margin itself is explained in markup vs margin, and how a kitchen's hours set what it can make is in how to calculate production capacity.
Hours aren't the only fair driver. A business whose costs are mostly storage might spread by shelf space, and one where everything takes about the same time can use units. Pick the driver that best explains why the overhead exists.
Why overhead per unit moves with volume
Most overhead is fixed: the rent is the same whether you make 1,500 units or 3,000. So the overhead each unit carries falls as volume rises:
| Units a month | Overhead per unit |
|---|---|
| 1,500 | $1.60 |
| 2,200 | $1.09 |
| 3,000 | $0.80 |
If you recalculate the rate every month from what you made, your costs swing with every slow week, and so would your prices. Set the rate once from the volume you plan for the year, and check it each quarter. When you make more than planned, the extra overhead you recover is profit; when you make less, the shortfall is a loss, and it tells you the plan was too hopeful. That's the same logic as break-even point for a food business, seen one unit at a time.
Mistakes that throw the number off
- Counting your wage twice. If your time is costed as labor on each product, it isn't overhead as well.
- Leaving out yearly bills. Insurance, licenses and annual software go in at a twelfth a month.
- Dividing by capacity. Dividing by what the kitchen could make, not what it does make, makes overhead look smaller than it is.
- Putting direct costs in overhead. Packaging used by one product belongs on that product.
- Never revisiting it. A new lease or a second market stall changes the rate.
Get the calculator
Download the overhead cost per unit calculator. Type your monthly overhead and your products with their units, kitchen hours, direct costs and prices; it spreads the overhead by units and by hours, shows each product's full cost and margin both ways, and the overhead per unit at other volumes. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.
Where this stops working
Overhead per unit is an estimate, and that's fine: a sensible rate, set once, is as good as it gets. The trouble is that the rest of the cost is an estimate too, and it shouldn't be. The $2.19 of materials in a pack of kūlolo was worked out from last spring's taro and coconut milk prices, and the coconut milk has gone up twice since. A careful overhead rate added to a stale materials cost gives a precise-looking wrong answer.
How TaroStack does it
TaroStack makes the direct costs exact, batch by batch, so the overhead rate you add is the only estimate left in the price. It doesn't spread your rent for you; it gets the rest right.
Every batch, at what you paid. Recording a batch takes each ingredient and packaging item off stock from the lots used, at what you paid for each, freight and other landed costs included, and divides by what came out good. FIFO cost layers, or a moving average if you prefer, keep the cost of each lot as it was bought.
Actual against standard. Each batch shows its actual cost against the recipe's standard cost, and recipe truth checks, from your own batch history, whether a recipe yields what it claims and which ingredient's quantity is off.
And margins on what things actually cost. Margins are reported by product and by customer, and a price-creep report per supplier shows whose prices are moving, so the product whose margin is slipping shows up before the year-end.
| The cost | Spreadsheet | In TaroStack |
|---|---|---|
| Materials per unit | Last spring's prices | Every batch, at what you paid |
| Freight on ingredients | Often left out | In the landed cost |
| Yield | What the recipe hopes | What came out good |
| Overhead | Your rate | Your rate, on a true cost |
Recipes, batches, true cost and margins are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.