The direct labor costs are derived by multiplying the cost of labor per hour by the number of man-hours needed to complete the job. Remember to use not only the hourly wage, but also include fringe benefits. Any cost not readily identifiable with a particular product is overhead. These include indirect materials and indirect labor, such as maintenance, supplies, repairs, heat and light, depreciation and insurance. These are not charged to direct labor, but must be included as a cost.
Examples are clerical, legal and janitorial services and supplies.
Insurance, taxes, rent, advertising and transportation are also overhead costs. Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. Adjust your overhead costs annually. Charges must be revised to reflect inflation and higher benefit rates.