Allocate Overheads to Jobs: Choose a Cost Driver That Fits

A job can look profitable under one overhead allocation and weak under another, even though nothing about the work changed. The worksheet below helps a service owner see why. It is an internal costing comparison, not a financial-reporting policy.

Separate direct costs from the overhead pool

Assign job-specific materials and subcontractors directly where the evidence supports it. Build a separate pool for shared costs such as rent, general software and administration. Check that a loaded labour rate hasn't already recovered part of that pool.

Xero describes an overhead rate as the overhead pool divided by the chosen allocation measure. The choice of measure matters as much as the division. Hours may fit shared workshop costs; order count may fit a similar amount of administration per order. A single percentage can hide those different uses of your time and space.

Compare the same two jobs three ways

Assume these two jobs make up the entire activity of a small, fictional monthly cost pool. Job A earns $3,000, uses 10 delivery hours and has $1,200 of direct costs. Job B earns $2,000, uses 30 hours and has $1,400 of direct costs. Shared overhead is $1,200.

Assumptions: Fictional Australian-dollar management-costing example. Amounts exclude GST that is assumed recoverable; any non-recoverable tax is already included in costs. These assumptions do not establish your GST entitlement. Contribution is before unallocated overheads and income tax.

Basis	A overhead	A result after allocation	B overhead	B result after allocation
Delivery hours: A 25%, B 75%	$300	$1,500	$900	−$300
Job count: one job each	$600	$1,200	$600	$0
Revenue: A 60%, B 40%	$720	$1,080	$480	$120

Original ASBG worked example. All businesses, amounts and scenarios are fictional. The table contains the same figures as the visual.

Under every method, the combined result is $1,200: $5,000 revenue minus $2,600 direct costs minus $1,200 overhead. The allocation changes the result attached to each job, not the business total.

The hour-based method assigns $30 per hour: $1,200 divided by 40 hours. Job count assigns $600 per job. Revenue assigns 24 cents per dollar of revenue. Keep these workings with the table so someone can reproduce it without accepting a hidden spreadsheet formula.

Choose the driver from the work

Ask what causes each shared cost. If both jobs require one identical booking and invoice, equal allocation may suit that administration pool. If B occupies a scarce workshop for three times as long, hours may better describe its use of that space. Revenue can be convenient, but a high-priced material passed through to a customer doesn't necessarily create more administration.

You can split overhead into a small number of pools. For example, allocate booking administration by completed jobs and workspace cost by delivery hours. Avoid dozens of tiny pools that cost more to maintain than the decision is worth. Write the reason for each allocation and retain the underlying activity count.

Check realistic capacity before using the rate in quotes

Suppose an annual $24,000 overhead budget is spread over 1,200 expected billable hours. That is $20 an hour. At only 900 hours, the same rate recovers $18,000, leaving $6,000 unrecovered. If 900 hours is the realistic forecast, the rate needed to recover that pool becomes $26.67 an hour after rounding.

Use hours you can reasonably expect to sell. Compare the plan with time records and sales demand. The hourly-rate guide walks through the available-hours calculation.

Don't use a full-cost allocation as the only acceptance test

An extra job during unused capacity may cover its additional costs and contribute something to overhead you would pay anyway. But taking that job can also displace better work or establish an unsustainable repeat price. Show both the contribution before shared overhead and the result after allocation.

If you keep accepting work below full cost, the annual budget still has to be funded somewhere. Business.gov.au's pricing guidance puts costs alongside demand and customer value; a cost allocation is one input to that decision.

Where to get help

Use actual job reviews to test the activity assumptions and the rush-job worksheet when capacity is already full. Return to pricing strategy or the pricing and profit hub for the next check.