How to allocate overhead to your food products

To allocate overhead to your products, add up everything you pay each month that does not belong to a particular batch (rent, electricity, gas, water, phone, insurance, accountant), divide it by your kitchen hours for the month, and multiply that hourly rate by the hours each batch takes. Then divide by the units in the batch. That way each product carries overhead according to how long it uses the kitchen, not how many units it happens to produce.

What counts as overhead

Overhead is what the business needs to run but you cannot pin on a specific batch:

• Rent, or the share of your home the business uses
• Electricity, gas and water, when you do not measure them per batch
• Phone and internet
• Insurance, accountant, software and subscriptions
• Licences and registrations you renew (check the amounts with your local authority)
• Cleaning supplies

What does not go here: ingredients and packaging (added directly per unit), your production time (counted as labour), and delivery, which is a cost per order and worked out separately, as covered in the real cost of delivery.

Most overhead is fixed: you pay the same whether you make 5 batches or 15. The difference between costs that move with production and costs that do not is explained in fixed vs variable costs. Overhead is one of the easiest hidden costs of a food business to lose track of, because it arrives once a month instead of with every purchase.

Step 1: add up a normal month

Use the average of your last three bills for electricity, gas and water, because they vary. If you cook at home, separate the business share: compare a month with production against one without, or estimate what part of the use is your baking. Pick a reasonable share and do not change it every month.

Step 2: choose a basis

There are three options:

• Per unit. Monthly total ÷ units produced. Simple, but it only works if all your products take roughly the same time and kitchen.
• Per batch. Monthly total ÷ batches in the month. Fine if all your batches take about as long.
• Per kitchen hour. Monthly total ÷ kitchen hours in the month. The fairest when your products differ, because energy and space are used up over time.

Count as kitchen hours all the time the kitchen is tied up by the business, including setting up and cleaning down. That time is fixed per batch and often forgotten: see setup and cleanup time.

Step 3: work out the rate and spread it

rate per hour = monthly overhead ÷ kitchen hours in the month

overhead per unit = rate × batch hours ÷ units in the batch

Worked example: brownies, granola and meal prep boxes

You rent a small unit with a friend and make three products. Your share of overhead in a normal month:

Your kitchen hours for the month, including setup and cleanup:

Rate per hour: $900 ÷ 90 hours = $10 per kitchen hour.

Per product:

• Brownies: 2.5 h × $10 = $25.00 per batch ÷ 48 = $0.52 per brownie.
• Granola: 2 h × $10 = $20.00 per batch ÷ 20 = $1.00 per jar.
• Meal prep: 4 h × $10 = $40.00 per batch ÷ 30 = $1.33 per box.

Check that it all gets allocated: 576 brownies × $25/48 = $300; 200 jars × $1.00 = $200; 300 boxes × $40/30 = $400. Total $900.

What happens if you allocate per unit

In the month you make 576 brownies, 200 jars and 300 boxes: 1,076 units. Allocated per unit, each one carries $900 ÷ 1,076 = $0.84.

Allocating per unit, each meal prep box looks $0.49 cheaper than it is. Over 300 boxes that is about $150 a month the brownies are quietly paying for. If you set prices or decide what to push using those numbers, meal prep looks more profitable than it is and brownies look worse, and you can end up raising the price of the wrong product.

When to take something out of overhead

If a cost clearly belongs to one product, take it out of the shared pool and put it on that product. Gas or oven energy is the usual case: meal prep might use the hob for hours while brownies bake in 30 minutes. If you can estimate the energy a meal prep batch uses, it goes straight into that product's cost and the shared pool shrinks. The same goes for a chest freezer that only one product uses.

Slow months

If you only work 60 kitchen hours one month instead of 90, the rate jumps to $900 ÷ 60 = $15 an hour. Do not change prices every month because of it; set them from a normal month. But know that in slow months every unit carries more overhead, and the difference comes out of your profit.

Common mistakes

• Ignoring rent because you cook at home. If the business uses the kitchen, it uses part of the space and the bills.
• Spreading overhead per unit across very different products. The one that ties up the kitchen longest ends up undercosted.
• Setting the rate from your slowest month. It gives you prices that will not hold in a normal month.
• Counting energy twice. If you put it in the batch, take it out of monthly overhead.

Do it with the calculator

In the food cost calculator, multiply your overhead rate per hour by the hours each batch takes and enter the result in "Gas, power and other per batch"; it adds it to that recipe's loaded cost.