Updated
Total overhead = sum of costs classified as indirect overhead
What the term means
Overhead describes indirect costs supporting operations rather than a single unit or job. Production overhead can belong in cost of goods sold. Selling and administrative overhead can be classified separately.
Source and scope
IRS — Publication 334, Overhead expenses identifies factory overhead such as rent, utilities, insurance, depreciation and taxes as manufacturing costs. This tax guidance does not mean every overhead item is a period expense outside cost of goods sold.
Use consistent classifications
Before computing gross margin, identify which costs belong in cost of goods sold under the accounting method used. Avoid subtracting a cost twice. A percentage computed from one cost classification is not directly comparable with a percentage based on another.
General education only.
Questions owners ask
Is all overhead outside cost of goods sold?
No. Production overhead can be part of cost of goods sold.
What can production overhead include?
IRS Publication 334 identifies factory costs such as rent, utilities, insurance, depreciation and taxes.
How do I avoid double-counting overhead?
Document the classification and allocation of each cost before totaling job costs and period expenses.