What Is (And How To Calculate) Distribution Of Overhead By Sales Explained

In this video we discuss what is and how to calculate the distribution of overhead, for a business, based on sales. We go through a basic example showing the calculations

Transcript/notes
Companies must distribute their overhead expenses, such as rent, taxes and insurance, to various departments in the company. One of the methods to do this is distribution of overhead by sales.

As a very basic example, let’s say a store has overhead expenses of $60,000, and the store has 4 departments, clothing, food items, health and beauty, and electronics.

To calculate the distribution of overhead by sales there are 3 steps, calculate the total sales for each department, calculate the ratio of each department based on sales, and then multiply each department’s sales ratio by the total amount of overhead.

Using our store example, let’s go through this. Step 1 is to calculate the total sales for each department. The clothing department had a total of $50,000 in sales, the food department had a total of $30,000 in sales, health and beauty had $18,000 in sales, and electronics had a total of $27,000, and step 1 is complete.

Now for step 2, calculate the ratio of each department based on sales. To do this, we first add up the total sales from all 4 departments, which, as you see, totals $125,000. To find the sales ratio for each department, we divide each departments sales by the total amount of sales. So, for the clothing department, we have $50,000 divided by $125,000, which equals .4, or 40%. And here are the other 3 departments ratios with the division written out on the screen. And step 2 is complete.

Now for step 3, multiply each department’s sales ratio by the total amount of overhead. Starting with the clothing department, we have a sales ratio of 40%, or .40, so, we multiply that by the amount of overhead, $60,000, and that results in $24,000. Now for the food items department, we have 24%, or .24 times $60,000, which equals $14,400. And here are the calculations for the health and beauty, and electronics departments. And that completes step number 3, and the process is complete.

We can also check our work by adding up the 4 departments overhead allocations, and we do get $60,000.

Chapters/Timestamps
0:00 Intro, what is overhead?
0:12 Example set up
0:21 3 steps to calculate distribution of overhead by sales
0:38 Step 1, calculate sales for each department
0:57 Step 2, calculate the ratio for each department based on sales
1:30 Step 3, multiply departments sales ratios by total amount of overhead
2:05 How to check the numbers