Overhead Allocation Methods

Why Allocation Method Matters

Overhead is a real cost, but it cannot be directly measured per product the way materials can. The allocation method is the rule that determines how much overhead each product carries. Choose the wrong method and some products are overpriced while others are underpriced — both lead to lost sales or lost profit.

CrafterBy supports two allocation methods:

Method 1: Per-Product (Equal Allocation)

Every product produced gets an equal share of the monthly overhead, regardless of its complexity or the time required to make it.

Formula: Overhead per product = Monthly overhead total / Estimated products produced per month

Example: Monthly overhead is €500, you estimate producing 100 products per month.
Overhead per product = €500 / 100 = €5.00

Every product — whether it takes 10 minutes or 3 hours — gets €5.00 of overhead allocated to it.

When to Use Per-Product

• Your product range is relatively uniform in complexity and production time.
• Most products take roughly the same amount of time to make.
• Simplicity is more important than precision (you want easy, understandable costs).

Method 2: By Labour Hours (Proportional Allocation)

Overhead is distributed in proportion to the labour hours a product requires. A product that takes twice as long gets twice the overhead.

Formula: Overhead per product = (Product labour hours / Total monthly labour hours) x Monthly overhead total

Or equivalently: Overhead hourly rate = Monthly overhead / Total monthly labour hours, then multiply by product labour hours.

Example: Monthly overhead is €500, you work 200 hours per month in production.
Overhead rate = €500 / 200h = €2.50 per labour hour

• A product taking 30 minutes (0.5h) gets: 0.5 x €2.50 = €1.25 overhead
• A product taking 3 hours gets: 3 x €2.50 = €7.50 overhead

When to Use By Labour Hours

• Your product range varies significantly in complexity — some products take 20 minutes, others take 4 hours.
• You want more accurate costs that reflect the true resources consumed by each product.
• You have complex custom pieces alongside simple standard products.

Side-by-Side Comparison

Using the same business: €500/month overhead, 100 products/month, 200 total labour hours/month.

With per-product allocation, the simple stud earrings carry the same overhead as a 3-hour custom necklace. This overprices the earrings and underprices the necklace. The by-labour-hours method distributes overhead more fairly across a mixed range.

Changing Your Allocation Method

You can change the allocation method in your overhead settings at any time. When you change the method, CrafterBy recalculates the overhead allocation on all products that use overhead. Review your product costs and selling prices after changing the allocation method to ensure margins remain at your target.