How to Calculate Overhead Costs for Handmade Products — With Worked Examples
Learn exactly how to calculate and allocate overhead costs per unit for handmade products. Step-by-step allocation methods with real worked examples, not just a list of hidden expenses.
Most advice about overhead costs for handmade businesses stops at the list. “Don’t forget your rent, utilities, and insurance!” Great. Now what?
Knowing what your overheads are is just step one. The real work is figuring out how much each product needs to absorb. That’s overhead allocation. And it’s what most makers skip, usually because nobody explains how to actually do it.
This guide covers the full calculation: how to total your overhead costs, pick an allocation method, calculate an overhead rate, and apply it to each product. With worked numbers throughout.
If you want a quick primer on what counts as overhead in the first place, start with how to factor in overheads to your product pricing. Then come back here for the maths.
Why Overhead Allocation Actually Matters
Here’s the problem most makers run into. They calculate their material cost per product. They add up their time. And they think they’re done.
But overhead costs keep running whether you make anything or not. Rent. Electricity. The subscriptions you use for your shop. The storage unit. Your business insurance. All of it ticks away every month, and if your pricing doesn’t account for it, those costs quietly eat your margin.
The question isn’t just “what are my overheads?” It’s “how much of my overhead does this specific product need to cover?”
A soap bar you make in 5 minutes should absorb less overhead than a piece of jewellery that takes 2 hours. A small candle uses less of your workshop than a large custom order that ties up your bench for a day. Treating every product equally means you’re overcharging on some things and undercharging on others.
Allocation is how you fix that.
Step 1: Total Your Monthly Overhead Costs
Start by listing every business expense that isn’t directly tied to making a specific product. These are your overheads:
Fixed overheads (same every month):
- Rent or studio/workshop space (even a portion of your home office)
- Business insurance
- Software subscriptions (Craftybase, Etsy fees, accounting tools)
- Equipment loan repayments
- Internet and phone (business portion)
Variable overheads (fluctuate but not per-product):
- Electricity and utilities
- Packaging supplies used across all products
- Cleaning and maintenance
- Merchant/transaction fees (if you treat these as overhead rather than per-order costs)
Add them up. You want a realistic monthly overhead total. If some expenses are annual (like insurance), divide by 12.
Example: A soap maker with a home studio totals up:
- Home office/studio allocation: $150/mo
- Utilities (power, water): $80/mo
- Business insurance: $25/mo
- Software (Craftybase, accounting): $35/mo
- Packaging (outer boxes, tissue paper): $40/mo
- Total monthly overhead: $330/mo
Keep this number. You’ll need it in the next step.
Step 2: Choose an Allocation Base
An allocation base is the activity you’ll use to distribute overhead across your products. The most common options for handmade businesses are:
Units produced: Simplest method. If you make 330 items a month, each item absorbs $1 of overhead (at $330/mo). Works well when all your products take similar time and effort.
Direct labour hours: Allocates overhead in proportion to how long each product takes to make. A 2-hour product absorbs twice as much overhead as a 1-hour product. Best when your products vary significantly in production time.
Machine or equipment hours: Useful if you use equipment (kilns, cutting machines, presses) that drives a significant portion of your overhead. Products that use the machine more absorb more.
For most small makers, direct labour hours gives the most accurate result. Units produced is fine if your product range is relatively uniform.
Step 3: Calculate Your Overhead Rate
The overhead rate formula is:
Overhead Rate = Total Monthly Overhead ÷ Total Monthly [Allocation Base]
Let’s work through both methods with numbers.
Overhead Rate by Units Produced
If our soap maker produces 500 items per month:
Overhead Rate = $330 ÷ 500 = $0.66 per unit
Every product (big or small) absorbs $0.66 of overhead.
Overhead Rate by Direct Labour Hours
If the same soap maker spends 110 hours per month making products:
Overhead Rate = $330 ÷ 110 = $3.00 per direct labour hour
A product that takes 20 minutes to make absorbs $1.00 of overhead. One that takes 60 minutes absorbs $3.00.
This is more accurate, and it’s why the labour hour method is worth the extra step.
Step 4: Apply the Rate to Each Product
Now you take your overhead rate and apply it to each product in your range. Add the result to your materials cost and labour cost to get your total cost of goods.
Worked Example: Soap Maker with Three Products
Our soap maker makes three products:
| Product | Materials | Labour time | Labour cost ($18/hr) |
|---|---|---|---|
| 100g bar soap | $1.80 | 12 mins | $3.60 |
| Bath bomb (set of 4) | $2.50 | 20 mins | $6.00 |
| Shampoo bar | $2.20 | 15 mins | $4.50 |
Using the overhead rate of $3.00 per direct labour hour:
| Product | Labour time | Overhead allocated |
|---|---|---|
| 100g bar soap | 12 mins (0.2 hrs) | $0.60 |
| Bath bomb set | 20 mins (0.33 hrs) | $1.00 |
| Shampoo bar | 15 mins (0.25 hrs) | $0.75 |
Now the full cost picture:
| Product | Materials | Labour | Overhead | Total cost |
|---|---|---|---|---|
| 100g bar soap | $1.80 | $3.60 | $0.60 | $6.00 |
| Bath bomb set | $2.50 | $6.00 | $1.00 | $9.50 |
| Shampoo bar | $2.20 | $4.50 | $0.75 | $7.45 |
This is your COGS per unit. Sell below this number and you’re losing money, no matter how many units you shift.
Notice the bath bomb set absorbs more overhead than the soap bar, because it takes longer to make. That’s the point. The labour-hour method reflects actual resource consumption rather than treating every product as identical.
Checking Your Work: Does the Math Add Up?
One useful sanity check: multiply your per-product overhead figure by total units made, and it should roughly equal your monthly overhead total.
If you made 150 soap bars, 80 bath bomb sets, and 100 shampoo bars this month:
(150 × $0.60) + (80 × $1.00) + (100 × $0.75) = $90 + $80 + $75 = $245
That’s less than $330, which means either you underestimated production hours, some products haven’t been costed yet, or you need to revise your allocation base. This check is worth running monthly. It catches errors before they compound.
What If You Make Products Across Very Different Categories?
If your product range is broad (quick 5-minute items alongside complex 3-hour pieces), you might find that a single overhead rate over- or under-charges certain lines.
One option: split your products into cost pools and calculate a separate rate for each. Your quick items use one rate; your complex, equipment-heavy items use another. It’s more work, but it produces more accurate pricing for the full range.
The simpler alternative: use the labour-hour method and trust the allocation to do its job. A 3-hour product will naturally absorb six times more overhead than a 30-minute one. For most makers, that’s close enough.
Overhead Rate vs. Overhead Percentage
You’ll sometimes see overhead expressed as a percentage of materials cost rather than a rate per unit or hour. The formula is:
Overhead Percentage = (Total Overhead ÷ Total Material Cost) × 100
If your monthly overhead is $330 and your monthly material spend is $660, your overhead percentage is 50%. So every dollar you spend on materials gets $0.50 added for overhead.
This method works well when your products are similarly materials-intensive. It’s less accurate when some products are material-heavy but fast to make, and others are cheap on materials but labour-intensive.
For most handmade businesses, the labour-hour method gives a truer result. But the percentage method is simpler to maintain, so pick the one you’ll actually use consistently.
Using Software to Handle Overhead Allocation Automatically
Doing this by hand in a spreadsheet works when you have a handful of products. But as your range grows, keeping overhead rates updated manually becomes error-prone. Change your rent, forget to update the rate, and every product in your catalogue is suddenly mispriced.
Craftybase handles overhead allocation as part of recipe costing. You enter your overhead expenses once, set your allocation method, and the cost per unit updates automatically as your expenses change. Your COGS reports reflect the full picture: materials, labour, and overhead, without recalculating everything by hand each month.
Common Overhead Calculation Mistakes
Using the same rate for years. Your overheads change. Rent goes up. You add a new subscription. Studio utilities creep higher in winter. Review your overhead total at least twice a year and recalculate.
Forgetting time-based overhead. If you pay yourself a set monthly amount regardless of production volume, that’s overhead, not direct labour. It needs to be allocated, not just added as a flat rate.
Only calculating for bestsellers. It’s tempting to only run the numbers on your most popular products. But your slow-moving items might be the ones you’re undercharging for, because they tie up your space and time disproportionately. Run allocation across your whole range.
Confusing overhead with direct costs. Packaging specific to one product? That’s a direct material cost — include it in the recipe, not in overhead. Packaging tape used across everything? That’s overhead. The distinction matters for accuracy.
Frequently Asked Questions
How do I calculate overhead cost per unit for handmade products?
Divide your total monthly overhead by your chosen allocation base: either total units produced or total direct labour hours. For a labour-hour rate, divide monthly overhead by monthly production hours, then multiply by each product's production time. A product taking 20 minutes at a $3.00/hr overhead rate absorbs $1.00 in overhead.
What counts as an overhead cost for a handmade business?
Overhead includes any business expense not tied to a specific product: studio rent, utilities, insurance, software subscriptions, shared packaging supplies, and equipment maintenance. Direct material costs (ingredients in a specific recipe) and direct labour (time to make one unit) are not overhead. They belong in your recipe/BOM costing instead.
Should I use units produced or labour hours to allocate overhead?
Use direct labour hours if your products vary significantly in how long they take to make. It gives a more accurate result. Use units produced if your product range is relatively uniform in production time. Labour hours take slightly more tracking but prevent fast-to-make items from absorbing the same overhead as complex, time-intensive ones.
How often should I recalculate my overhead rate?
Review your overhead rate at least every six months, or whenever a significant expense changes: rent increase, new subscription, change in production volume. Stale overhead rates are a common reason makers find their pricing slowly drifting out of alignment with their actual costs.
Does Craftybase calculate overhead costs automatically?
Yes. Craftybase lets you enter your overhead expenses and allocation method once, and it applies the overhead rate to your recipe costs automatically. When your expenses change, your per-product costs update across your entire product range without manual recalculation. Your COGS reports reflect materials, labour, and overhead together.
The Short Version
Calculating overhead for handmade products means four steps: total your monthly overheads, choose an allocation base (units or labour hours), divide to get a rate, and apply it to each product. The labour-hour method takes a little more work but gives you pricing that actually reflects how your business runs.
Once you know your per-unit overhead, combine it with your material costs and labour to get a true total COGS. That number is the floor for your pricing, and everything above it is margin.
If you want to stop doing this by hand, Craftybase handles the overhead allocation for you as part of recipe costing. Try it free for 14 days — no credit card needed.
