In business, overhead cost often refers to business expense operations. This is also referred to as operating expense. Overhead can be summed up as the indirect cost associated with materials utilized for direct labor. They generally are categorized into three main branches; indirect material cost, indirect labor, and all other miscellaneous products. Overhead is a very important cost component along with direct materials and direct labor costs. Examples of overhead cost include rent, gas, and electricity. Overhead costs include some of the following:
Indirect labor
Payroll Taxes
Employee Fringe Benefits
Insurance
Office Expense and Supplies
Depreciation
Automobiles
Rent
Repairs and Maintenance
Marketing Cost
Cost of Facilities
Cost of Capital
Overhead cost is not just associated with keeping the lights on in the company. Supplies used by employees are one of the overhead costs that can vary from company to company, and there is no finite price tag on how much it can amount to. Putting a price tag on an employees salary is one thing, but calculating how much you are actually paying them, with overhead, versus ideally are two separate discussions.
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Salary is the primary indicator that most people use to identify what an employee is truly worth. Salary is a business expense and companies use it as a means of placing a price tag on an employee’s position. Several things come to mind when determining a salary,
How much is this position worth in the company?
How much more would this employee benefit the company?
This maybe easier to estimate for positions that directly bring in money, but what about the staff that doesn’t bring in money flow? For instance, administrative and support staff. They provide an indirect form of money to the company, by saving money rather than spending.
Every position has its place and determining what its worth is based on the company and its demands for the employee. This is a direct measure of an employee's worth to the company and a very obvious one. Most people believe that this is the primary and only concerning overhead cost of employees, but that is not the whole story. Remember that employee overhead cost for say an administrative position would be different for an electrical engineering designer.
Overhead rate is the total indirect cost for a specific reporting period, divided by allocation measures. Often companies understand what overhead cost is and often compensate for it through product pricing and taxes. Some don’t understand that overhead rates very from one company to the next and need to be further investigated in order to gage revenue. Last thing anyone wants to see is projected revenue sales to be underestimated and profit margins low.
Companies that understand this principle know that when any new employee is hired that there is not only the base salary to consider, but also the indirect elements that the individual will use to properly fulfill their role. This includes things like office supplies, work space, utility usage, and much more. These items are hard to quantify in dollars and are often averaged out from all employees in the company. This allows the company the put an actual dollar amount to the price of an employee. The overhead rate is a multiplier multiplied by the employees base salary. This is a better approximated amount of money that a company pays to an employee.
This article will dive the specific areas that directly influence employee overhead cost. This guide will help put perspective on where and what overhead costs can amount too and why they should not be underestimated.
Generally operating supplies are a relatively minor cost of daily operations, but they must be included in the operating or manufacturing cost estimation. Such costs include miscellaneous items like lubrication oils for manufacturing, office supplies, instrumentation charts, and more. The details for what is to be considered operational supply overhead is sometime a grey area and some companies use a percentage of the payroll as a basis. This percentage can range, for example, a power generation plant, from a few percents to 20% or more, depending if routine maintenance items and supplies are accounted in the estimate.
Average office supply costs are calculated in a variety of ways. One that is often used is the cost per employee, a figure that can range from a few hundred dollars per year to more than a thousand, depending on factors like industry and the nature of the business, as well as organization size, culture, and policies. A good rule of thumb is $200 dollars per person per year for corporations. This is just an estimation if exact office supply spendings are not accounted for.
Unless you are hiring someone that is continuously travelling, most employees are going to require work space. Obviously the rent per square foot varies depending on the facilities monthly rent. But how many square feet does an employee need? Again this varies, but there are some guidelines. Work cubes are typically 8’ x 8’ in size and private offices range in size. When you add in common space usually it is an addition 225 to 250 square footage. Knowing the total rent for the facility vs square footage will give better perspective on how much a square foot costs. Furnishing the space, even with used work cubicles will probably run $2000 at minimum, for the computer, monitor, desk chair, and more.
The basics these days for high tech or office workers have to include a computer and telephone. Even with decreases in PC prices, figure on $1000, or more, for a computer, $500 to several thousand for software and $250 to $300 initially per telephone handset on average when you factor in installation. Don’t forget that all existing softwares will require an upgrade at some point, which will require further funds in the future. Some employees, for example an electrical engineering designer, would need safety equipment for use in hazardous areas, this could include items like safety glasses and gloves, ear plugs, laboratory coats, and worker boots.
Employee benefits, also called fringe benefits, includes various types of non-wage compensation provided by the employer. Examples of these benefits include; housing, health insurance retirement benefits, daycare, tuition reimbursement, sick leave, vacation, profit sharing, and other specialized benefits. Companies offer benefits however they think best for the employees. Benefits are not necessarily included for each position and some companies offer a maximum amount of benefits, while others offer none.
If your company name is on the vehicle title, you’ll need to purchase commercial auto insurance. If the vehicle is owned by an individual, you must purchase a personal auto insurance. Commercial auto insurance is usually two to three times more expensive than personal auto insurance. Why is this? The risk is greater since several individuals are driving for a company, rather than a single person. Even though commercial auto insurance premiums are more expensive, commercial insurance offers more coverage that personal.
Taxes are imposed on employers based how how much they pay their employees. There are two types of taxes. The first kind are taxes that employers are required to withhold from employee’s wages, also known as withholding tax, and often covering advance payment of income and various forms of insurance. The second kind is a tax that is paid from the employer’s own funds and that is directly related to employing a worker. These can consist of fix charges or be proportionally linked to an employee’s pay. The chargers paid by the employer usually cover the employer’s funding or the social security system, and other insurance programs.
Lets take a look at an example employee and see what they are actually costing the company. An electrical engineering designer hourly compensation is $28, or $70,000 gross annual payroll. As an employer you do research and find that the electrical engineering designer has a variety of additional costs attached to the position:
$5,880 for payroll taxes (based on percentage of local taxes)
$7,000 for worker’s compensation insurance (at $10 per $100)
$350 for health insurance (based on $350 per month)
$2,100 for retirement benefits (3% of compensation)
$720 for cell, telephone, and/or internet costs ($60 per month)
$200 for safety equipment ($125 worker boots, $50 lab coat, $25 safety glasses and gloves)
$6,000 in company vehicle usage (depreciation, gas, repair, license, insurance, etc)
$300 for clerical supplies and equipment usage ($25 per month)
$1,750 for annual bonuses (based on 2.5% of salary)
$500 for training fees, seminars, etc
$2,400 for traveling expenses (includes airfare, housing, and meals)
Totaling an additional $27,200.
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Now lets determine how many hours the electrical engineering designer is potentially available for company work. Lets start with 52 weeks/year x 40 hours/week = 2,080 hours.
Then you will deduct the electrical engineers non-project paid time for the year (theses values are used as an example and vary per company).
Assume 9 holidays
14 vacation days
8 sick or personal days
2 weeks of training seminars
This is 45 days, or 360 hours, leaving a total 1,720 hours available to work.
You will then deduct two hours from the remaining 43 weeks for miscellaneous administrative meetings, timekeeping, general problem-solving or prep time and so forth. This reduces the available production time by another 86 hours, leaving a total of 1,634 available working hours for the electrical engineering designer.
The electrical engineering designer’s additional Labor Burden Cost total was over $27,000. This brings the electrical engineers total annual cost to $97,200. The labor burden cost per production hour to the company is $59.49 per production/project hour ($97,200 / 1,634 hours), or $0.99 per minute.
To calculate the electrical engineering designer’s labor burden rate (%) per production (work) hour, deduct the engineer’s hourly rate from, the individual’s fully burden cost ($59.49 - $28 = $31.49). This indicates that the additional cost to have the electrical engineer on the job, when computed as a percentage, add 113% ($31.49/$28 * 100) to the electrical engineer’s base hourly rate.
The electrical engineering designer is a truly costly and valuable asset whose time should be carefully assigned. And the related costs should be closely measured and monitored.
The contents in this article are to open your eyes and to truly understand employee cost within any company. Remember calculating employee cost is not a simple as the example presented and the rates can change based on region that the company is located in. The example is a means of putting overhead cost into perspective. You cannot take things at face value and expect that the only cost to the company, per employee, is the base salary offered. Overhead cost is just as important as direct cost. Overhead cost should be understood as it can make or break a company's expected revenue, if taken or not taken into account. Remember to monitor overhead spending and gain a true cost of what your company pays for each of its overheads.