Overhead Allocation for Solo Makers: The Step-by-Step Breakdown
You're pricing products at materials + labor, wondering why you're losing money. Meanwhile, $1,200/month in studio rent, utilities, insurance, and equipment depreciation goes unaccounted for. Here's how to allocate overhead properly—without complex accounting.
The $14,400 That Vanished
Rachel runs a ceramics business from a rented studio. She meticulously tracks clay costs ($18/product) and labor ($45/product), pricing mugs at $90 for what she thinks is a 30% profit margin. But her $600/month rent, $150 utilities, $200 kiln depreciation, $100 insurance, and $150 in other overhead—totaling $1,200/month or $14,400/year—isn't reflected in any product price. She sold 480 mugs last year expecting $12,960 profit, but after overhead, she netted -$1,440. She worked full-time for negative money.
Overhead is the invisible expense killer in handmade businesses. Unlike materials (you see the invoice) or labor (you feel the hours), overhead operates in the background—rent due whether you make one product or one hundred, insurance charging monthly regardless of sales, equipment depreciating silently every day.
Most solo makers ignore overhead entirely, pricing products at materials + labor and wondering why they're always short on cash. The solution isn't complex accounting—it's a simple allocation formula that distributes overhead costs across all products based on actual business expenses. This guide shows you exactly how to calculate, allocate, and price for overhead.
What is Overhead Allocation?
How do I calculate overhead for handmade products?
Calculate overhead allocation in 3 steps: (1) Total all monthly overhead expenses (rent, utilities, insurance, depreciation, supplies, subscriptions, marketing), (2) Calculate total monthly direct costs (materials + labor for all products), (3) Divide overhead by direct costs to get overhead percentage. Example: $1,200 overhead ÷ $2,400 direct costs = 50% overhead rate. Apply to each product: $30 materials + $50 labor = $80 direct cost × 1.50 (adding 50% overhead) = $120 total cost including overhead.
The Complete Overhead Inventory
What Counts as Overhead? (Everything That Isn't Materials or Direct Labor)
Overhead includes any expense that supports your business as a whole rather than being directly traceable to a specific product:
Category 1: Facility Costs
$300-1,500/month depending on location and size
For home studios: Allocate square footage percentage (e.g., 20% of home = 20% of rent/mortgage)
$100-400/month (electric, gas, water, internet)
Kilns and equipment can significantly increase electricity costs—track actual usage if possible
$50-200/month (general liability + property insurance)
Required if renting commercial space or selling at events; optional but recommended for home studios
$0-150/month (business property tax if applicable)
Varies by location; some states tax business equipment and inventory
Category 2: Equipment & Depreciation
$150-600/month (kilns, wheels, major tools)
Formula: Equipment Cost ÷ Expected Lifespan in Months (e.g., $3,600 kiln ÷ 60 months = $60/mo)
$50-200/month (repairs, element replacement, tool upkeep)
Budget 5-10% of equipment value annually for maintenance and repairs
$30-100/month (replacement ribs, sponges, brushes, wire)
Tools wear out and need regular replacement—track actual spend for 3 months
Category 3: Business Operations
$50-150/month (Shopify, Etsy, QuickBooks, Canva, email marketing)
Add up all monthly platform fees, SaaS tools, and digital subscriptions
8-12% of revenue (boxes, bubble wrap, tape, tissue, branded materials)
Can be allocated per-product or as overhead percentage depending on variability
5-15% of revenue (ads, photography, graphic design, promotional materials)
Highly variable; new businesses spend more, established businesses can reduce
$50-300/month (accountant, bookkeeper, lawyer, photographer)
Even DIY makers need occasional professional help—budget for it
Category 4: Miscellaneous
$50-200/month (material sourcing, post office, supply runs)
Track mileage for tax deductions and include in overhead calculation
$30-150/month (workshops, classes, books, online courses)
Skill development is a business expense—amortize annual costs monthly
$20-100/month (business license, permits, memberships)
Amortize annual fees monthly for consistent overhead calculation
Total Overhead Range by Business Size:
Part-Time (Home Studio)
$500-900
/month
Full-Time (Home Studio)
$900-1,500
/month
Commercial Studio
$1,500-3,000
/month
The Overhead Allocation Formula
Method 1: Overhead Percentage (Recommended for Most Makers)
Then apply this percentage to each product's direct costs
Calculate Total Monthly Overhead
Add up ALL overhead expenses from the categories above for one month:
Calculate Total Monthly Direct Costs
Add up materials + direct labor for all products produced in a typical month:
Monthly Production: 60 mugs
Calculate Overhead Rate
Divide total overhead by total direct costs:
Calculation:
$1,600 ÷ $3,780 = 0.423 = 42.3%
This means overhead adds 42.3% to every product's direct costs
Apply to Each Product
Multiply each product's direct costs by (1 + overhead rate):
Example: Handmade Mug
If you priced at $90 thinking you had a profit, you're actually breaking even after overhead.
Method 2: Hourly Overhead Rate (Alternative)
Some makers prefer adding overhead as an hourly rate instead of percentage. This works well if production times are consistent:
Add this rate to your labor rate when pricing
Calculation Example:
Apply to Product:
When to use hourly vs. percentage:
Use hourly method if production times are very consistent and you track hours precisely. Use percentage method if production times vary significantly or you produce diverse product types. Percentage is more common and easier to maintain for most handmade businesses.
Common Overhead Allocation Mistakes
Forgetting Equipment Depreciation
"I already paid for the kiln, so it's not a cost anymore"
Why it's wrong:
That $3,600 kiln will last ~5 years. If you don't allocate $60/month for replacement, you'll have no funds when it dies. Depreciation isn't just accounting—it's saving for inevitable replacement.
The fix:
Calculate: Equipment Cost ÷ Expected Lifespan (months) = Monthly Depreciation. Add to overhead.
Not Allocating Home Studio Costs
"I work from home, so rent is free"
Why it's wrong:
You're using 200 sq ft of your 1,000 sq ft home (20%). That's 20% of rent/mortgage, utilities, insurance—real costs even if paid personally. Not allocating this creates false profit.
The fix:
Calculate square footage percentage. Apply to rent, utilities, property tax, insurance. Include in overhead.
Using Last Year's Overhead Rate
"I calculated 35% overhead 2 years ago"
Why it's wrong:
Rent increases, subscriptions change, volume scales. Using outdated overhead rates leads to gradual profit erosion as costs creep up but pricing doesn't adjust.
The fix:
Recalculate overhead quarterly. Adjust pricing when overhead rate changes by 10%+ or at least annually.
Inconsistent Allocation
"I add overhead to some products but not others"
Why it's wrong:
Every product uses your studio, benefits from marketing, consumes utilities. Cherry-picking which products include overhead creates subsidy dynamics where profitable products fund unprofitable ones invisibly.
The fix:
Apply the same overhead rate to ALL products consistently. No exceptions.
Real Example: Complete Product Cost Calculation
Full Cost Breakdown: Handmade Ceramic Vase
Step 1: Direct Costs
Step 2: Apply Overhead (42.3%)
Complete Cost Summary:
Step 3: Add Profit Margin and Platform Fees
What Happens Without Overhead Allocation:
If you only priced at materials + labor + 30% profit:
Sale price: $151 (instead of $240)
You'd lose $14.07 per vase after overhead
At 20 vases/month: -$281.40 monthly loss
How TrueCraft Automates Overhead Allocation
Manually calculating and updating overhead rates quarterly is tedious. TrueCraft handles it automatically:
- Track all overhead expenses in categorized accounts (rent, utilities, depreciation, etc.)
- Automatically calculate overhead rate based on production volume and direct costs
- Apply correct overhead percentage to each product's BOM dynamically
- Alert you when overhead rate changes by 10%+ so you can adjust pricing
- Show true product profitability including all overhead allocation
Resources
SBA Accounting Guide: Overhead and Indirect Costs - Federal Small Business Administration guidance on calculating and allocating overhead expenses for product pricing.
AICPA Small Business Resources - American Institute of Certified Public Accountants resources on cost accounting methods and overhead allocation standards.
IRS Publication 587: Business Use of Your Home - IRS guidance on calculating home office overhead deductions and allocations for home-based businesses.
SCORE Business Mentoring - Free mentorship for calculating cost structures and overhead rates specific to your handmade business model.
Stop Forgetting Overhead Costs
TrueCraft automatically tracks overhead expenses, calculates allocation rates, and applies them to every product so you never lose money on hidden costs again.
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