How to Calculate Manufacturing Overhead Costs (With Examples and Formula)
Table of Contents
Inventory and warehouse management savings calculator
When it comes to building a profitable product-based business, it’s not just about how much you sell—it’s about how well you manage what it costs to make and move every unit.
And if you’re overlooking manufacturing overhead, you could be missing a key lever for protecting margins and making smarter pricing decisions.
For growing retailers navigating supply chain volatility and climbing production costs, understanding your overhead manufacturing costs is essential for accurate pricing and long-term profitability.
In this guide, you’ll get:
- A practical breakdown of manufacturing overhead (and why it matters more than ever)
- A look at fixed, variable, and semivariable overhead types—with real examples
- A simple formula for calculating total overhead
- Actionable steps to help your brand improve cost control and drive more profitable growth
Ready to turn cost awareness into a competitive advantage? Let’s dive in.
Inventory and Warehouse Management Savings Calculator
Uncover the cost of your mis-ships, out of stocks and lack of labor efficiency with our inventory management savings calculator.
🤔What Counts as Manufacturing Overhead—and Why It Matters
Manufacturing overhead includes all the indirect costs that keep your production operation running smoothly—costs like equipment maintenance, factory rent, and salaried staff. These don’t appear directly on your finished product, but they’re essential to making production happen at all.
And here’s the catch: whether you’re producing ten units or ten thousand, many of these costs don’t change. That’s why understanding and managing overhead is crucial—it affects your margins, pricing, and overall profitability. If you’re not tracking it closely, you risk making decisions based on incomplete cost data.
Getting a clear view of your overhead is about making smarter, more informed business moves. Whether you’re evaluating a new product line, planning for seasonal demand, or looking to improve efficiency, your overhead costs are part of every decision.
What’s Included in Manufacturing Overhead?
Here’s a look at the most common overhead costs ecommerce brands should account for:
- Utilities — Electricity, water, and heating for your production space
- Equipment upkeep — Routine maintenance, repairs, and calibration
- Facility costs — Rent, depreciation, and security for your warehouse or factory
- Taxes and insurance — On production-related assets and property
- Loan interest — If tied to production equipment or factory space
- Staff salaries — For roles like floor supervisors, quality control, and operations managers
- Admin tools — Security systems, software, and support that serve production indirectly
Understanding Overhead Categories
Different costs behave differently as your production scales—and understanding those dynamics helps you price more accurately and plan more strategically.
| Overhead Type | Common Examples |
| Fixed | Rent, salaried team members, property taxes |
| Variable | Packaging supplies, indirect materials, utility surcharges |
| Semivariable | Equipment maintenance, overtime, usage-based costs |
This distinction matters because not all overhead shifts in the same way when production scales up or down. Some costs stay steady no matter how much you produce, while others move in step with your output—or somewhere in between. That behavior plays a key role in how you calculate per-unit costs and protect your margins as your business grows or contracts.
In the next section, we’ll explore how to calculate total overhead—and why that number is essential to understanding your true cost of doing business.
🧐Why Manufacturing Overhead Costs Matter
It’s easy to focus on direct costs—raw materials, labor, and shipping. But not factoring your overhead can lead to dangerous blind spots in your business.
If you’re not accurately calculating overhead, you risk:
- Underpricing your products, shrinking margins without realizing it
- Overestimating profitability, which throws off your financial forecasts
- Making poor inventory decisions, due to hidden per-unit cost inflation
- Budget shortfalls, because recurring facility or admin expenses weren’t factored in
| Hypothetical example:An ecommerce apparel brand launches a new product line of custom sweatshirts. They calculate direct costs at $12 per unit (materials + labor) and price each at $30, assuming an $18 profit margin.But they forgot to include:$1,200/month in warehouse rent$800/month in part-time quality control help$150/month in insurance for production toolsWith 1,000 units sold that month, these overhead costs add $2.15/unit—wiping out nearly 12% of their margin. And if left unchecked, that mistake compounds fast. |
Types of Manufacturing Overhead Costs
To calculate overhead accurately, you need to understand the three categories of costs that make it up: fixed, variable, and semivariable.
Here are some common examples of overhead costs in manufacturing to help you classify them correctly.
a. Fixed Overhead Costs
These are the costs that stay the same no matter how much you produce. Whether you’re fulfilling 100 orders or 10,000, these expenses don’t budge month to month.
Examples:
- Rent or lease on factory space
- Salaried operations staff
- Insurance premiums
- Property taxes
Use Case:
Fixed costs offer consistency—making them easier to forecast. But they also need to be allocated across your production volume. That means if you’re producing less, your per-unit cost goes up. If you’re scaling, these costs get diluted across more units, improving your margins.
b. Variable Overhead Costs
These costs change in direct proportion to how much you produce. The more orders you fulfill, the more you spend.
Examples:
- Packaging supplies
- Shipping materials
- Power surcharges (based on machine use)
Use Case:
Variable costs can sneak up on you if you don’t track them closely. If your demand suddenly spikes and you haven’t budgeted for the increased usage, your profitability could take a hit. Keeping tabs on these lets you scale confidently—and respond quickly to shifts in order volume.
c. Semivariable Overhead Costs
Also called mixed costs, these have a stable baseline but increase with usage. They often start with a fixed component, then climb as production grows.
Examples:
- Equipment maintenance (base fee + per-use cost)
- Overtime pay for staff
- Factory security with performance bonuses
Use Case:
Semivariable costs can be tricky—they don’t show up as clearly on reports unless you’re tracking both the base cost and the usage-based portion. As your business scales, these costs often grow quietly in the background. Monitoring them closely helps prevent gradual margin erosion over time.
🆚Overhead Cost Types – Quick Comparison
| Type | Behavior | Common Examples | Financial Impact |
| Fixed | Doesn’t change with output | Rent, insurance, salaried staff | Predictable, helps with planning |
| Variable | Scales with production volume | Packaging, utilities, shipping | Affects per-unit costs directly |
| Semivariable | Part fixed, part volume-dependent | Maintenance, bonuses, hybrid fees | Harder to track—requires periodic review |
Using Overhead for Smarter Inventory Management
Understanding your overhead directly shapes how you manage stock, plan production, and price products.
Let’s say you’ve calculated your variable overhead per unit (e.g., $1.50 for packaging). Combine that with your fixed and semivariable costs, and you can pinpoint your break-even volume—the number of units you need to sell to cover total overhead.
For example:
- Fixed overhead: $2,500/month
- Variable overhead: $1.50/unit
- Selling price per unit: $5
You’d need to sell roughly 2,000 units to cover $5,500 in costs ($2,500 fixed + $3,000 variable). That insight helps you avoid overproducing, underpricing, or sitting on inventory you can’t profitably move.
This kind of overhead-informed planning is what separates guesswork from strategic growth. And as we’ll see next, calculating total overhead is easier than most brands think.
📱How to Calculate Manufacturing Overhead
The basic manufacturing overhead cost formula is simple:
| Total Manufacturing Overhead (MOH) = Fixed Overhead + Variable Overhead + Semivariable Overhead |
But applying it effectively means understanding what’s included—and ensuring you’re capturing costs accurately across all categories.
➡️Step-by-Step Instructions
- List all indirect costs.
Identify everything not directly tied to your product but necessary for production (see earlier table). - Categorize each expense.
Assign each to fixed, variable, or semivariable based on how it behaves. - Choose a time frame.
Monthly, quarterly, or annual totals—just be consistent. - Add up each category.
- Fixed Overhead: Rent, salaries, insurance, etc.
- Variable Overhead: Utilities, indirect materials, shipping costs, etc.
- Semivariable Overhead: Equipment use, overtime, maintenance.
- Plug into the formula.
| 📖Mini Glossary MOH (Manufacturing Overhead): All indirect costs tied to production, excluding direct materials and direct labor. Direct Costs: Expenses directly traceable to product creation (e.g., fabric, production wages). Indirect Costs: Necessary expenses not directly involved in production (e.g., factory rent, admin salaries). |
📌Pro Tip: Semi variable costs are notoriously hard to estimate—but you can get ahead of them with the right tracking habits.
Start by reviewing your historical expense reports from the last 6–12 months. Look for any costs that stay relatively stable up to a point, then increase as production or order volume grows.
Common examples include maintenance, utilities, or temp labor.
Once identified:
- Break them into two parts:
- Base cost: What you’d pay even if you produced nothing (e.g., a $2,000 monthly equipment maintenance retainer).
- Variable cost: The portion that scales with usage (e.g., $0.50 per unit once production exceeds 1,000 units).
- Use production logs or order volume reports to map spikes in these costs against changes in activity. This helps isolate the per-unit impact of the variable portion.
- Look for seasonal patterns: If you tend to produce more in Q4 or during peak campaign pushes, identify how these periods affect costs like overtime, wear and tear, or consumables.
- Set cost bands or ranges: Rather than trying to lock in a fixed number, establish a typical range (e.g., $1,500–$2,200/month depending on volume), and update quarterly based on actuals.
Getting this right means fewer surprises and more accurate unit economics, especially when planning for growth or high-demand periods.
Inventory and Warehouse Management Savings Calculator
Uncover the cost of your mis-ships, out of stocks and lack of labor efficiency with our inventory management savings calculator.
☝️🤓Example Calculations
Scenario 1: Small Ecommerce Brand
Inputs (monthly):
Fixed Overhead = $2,500 (warehouse rent + salaries)
Variable Overhead = $1.50/unit * 1,000 units = $1,500
Semivariable Overhead = $1,200 base + $0.50/unit * 1,000 = $1,700
Calculation:
Total MOH = 2,500 + 1,500 + 1,700 = $5,700
MOH per unit = $5,700 / 1,000 units = $5.70 per unit
Interpretation:
This brand may think they’re making $7 per unit—but with overhead included, their real margin is only $1.30. That’s a 529% difference. It’s the kind of gap that can quietly erode profit and leave the business cash-strapped, especially during seasonal slowdowns. Without factoring in overhead, they’re basing growth plans on faulty margins—and risk overcommitting on marketing, inventory, or hiring.
Scenario 2: Large Manufacturer
Inputs (monthly):
Fixed Overhead = $80,000 (plant lease, insurance, management salaries)
Variable Overhead = $3/unit * 20,000 units = $60,000
Semivariable Overhead = $10,000 base + $1/unit * 20,000 = $30,000
Calculation:
Total MOH = 80,000 + 60,000 + 30,000 = $170,000
MOH per unit = $170,000 / 20,000 units = $8.50 per unit
Interpretation:
At high volumes, precision matters. A simple $0.50 per-unit miscalculation in overhead adds up to a $10,000 forecasting error—every month. That kind of variance can derail pricing models, throw off contract bids, or lead to unexpected margin compression.
For a manufacturer operating at scale, this is a clear signal: overhead can’t be a back-office afterthought. It needs to be modeled dynamically, reviewed regularly, and integrated into real-time dashboards—especially when running high-SKU catalogs, fulfilling wholesale contracts, or adjusting to shifts in energy or labor costs.
Scenario 3: Mid-Sized Ecommerce Brand
Inputs (monthly):
Fixed Overhead = $10,000 (warehouse rent + salaried staff)
Variable Overhead = $2/unit * 5,000 units = $10,000
Semivariable Overhead = $2,000 base + $0.50/unit * 5,000 = $4,500
Calculation:
Total MOH = $10,000 + $10,000 + $4,500 = $24,500
MOH per unit = $24,500 / 5,000 units = $4.90 per unit
Interpretation:
On paper, this brand has a solid margin—but only if they consistently hit their 5,000-unit sales target. If volume dips even slightly, that $4.90/unit quickly becomes $5.50 or more as fixed costs are spread across fewer units.
This scenario highlights how fragile margins can be in mid-market ecommerce, where demand fluctuates and product seasonality matters. To protect profitability, this brand needs a tighter handle on demand planning and likely a minimum viable sales threshold to guide promotions, production runs, and reorder decisions
❌Common Mistakes to Avoid
Manufacturing overhead is a core input to pricing, planning, and profitability. Here are four common mistakes growing retailers make, and how to avoid them:
1. Ignoring Semivariable Costs
Why it’s a problem: These hybrid costs often fly under the radar. Brands account for the base fee (e.g., equipment service contracts) but miss the variable portion that scales with usage—like overtime pay or machine-hour charges.
What to do instead: Break semivariable costs into fixed and variable components using historical data. Track usage-based spikes over time, and adjust your forecasts quarterly to reflect real production behavior.
2. Misclassifying Expenses
Why it’s a problem: Blending direct and overhead costs leads to inaccurate per-unit margins. Common errors include putting direct labor (like assembly line workers) into overhead, or classifying admin salaries as direct.
What to do instead: Create clear definitions for what counts as direct vs. overhead. Build these into your accounting processes and cross-train ops and finance teams to avoid costly confusion.
3. Using Outdated Numbers
Why it’s a problem: Costs like utilities, insurance, and rent rarely stay static—especially during growth, inflation, or operational shifts. Using last year’s numbers can create a false sense of profitability.
What to do instead: Review overhead inputs at least quarterly. When production changes significantly—new facilities, new equipment, higher output—refresh your cost models to reflect current conditions.
4. Focusing Only on Per-Unit Costs
Why it’s a problem: Per-unit math is helpful for pricing, but it doesn’t tell the full story. When production fluctuates, your fixed costs don’t go away—they just get spread differently.
What to do instead: Balance per-unit analysis with total overhead impact. Use your break-even volume to guide decisions on batch size, production timing, or SKU viability—especially when demand is seasonal or inconsistent.
🤔💭Final Thoughts: From Hidden Cost to Strategic Advantage
For growing retailers, manufacturing overhead is one of the most powerful levers you have for building a profitable, resilient operation.
Breaking overhead into fixed, variable, and semivariable components gives you a clearer picture of how your costs shift as production scales. That clarity helps you make better calls—on pricing, capacity planning, inventory strategy, and margin targets.
Visibility into your complete overhead costs also gives your team real visibility into the cost side of the business—so you can launch with confidence, scale without guesswork, and protect profitability as you grow.
Take the time to revisit your numbers. Align them with your unit economics. Then connect that insight to your pricing, SKU mix, and production planning. Overhead might not show up on the product label—but it shows up everywhere else.
Ready to Take Cost Control Further?
If you’re looking to sharpen your operational strategy, overhead is just the beginning. Read our guides on these other essential metrics which are equally important for ecommerce teams focused on profitable growth:
If you’re ready to stop guessing—and start making faster, more profitable decisions—it might be time to see how Linnworks helps growing retailers centralize inventory, streamline costs, and stay ahead of demand across every channel.Book a demo and see how leading brands are turning visibility into smarter growth.
FAQs
A: Direct costs are tied directly to product creation—like raw materials and production labor. Manufacturing overhead includes all the indirect costs that keep your operation running, such as rent, equipment maintenance, and salaried operations staff. Both impact your margins, but overhead is often overlooked in early-stage pricing models.
A: At a minimum, review overhead quarterly. But if you’re scaling quickly, adding new SKUs, or seeing shifts in utility or labor costs, aim for monthly. Consistent reviews help ensure your pricing, inventory planning, and forecasting reflect current realities—not outdated assumptions.
A: Yes. For example, ecommerce apparel brands may carry heavier shipping and warehousing overhead, while manufacturers may face more equipment-related costs. Even within ecommerce, overhead varies based on order volume, fulfillment model (in-house vs. 3PL), and SKU complexity.
A: Start with your total monthly overhead, then allocate it based on production time, storage space, or order volume—whichever best reflects resource use. A bulky product might take up more warehouse space or require more packaging, so it should carry a higher share of the overhead than smaller, lower-touch items. The key is to match overhead allocation with real operational impact.
A: Definitely. If you’re only using direct costs to set prices, you’re likely underpricing—and cutting into your margins. Your true cost-to-sell includes overhead, and factoring it in gives you a more accurate view of profit per unit. This becomes even more important as you scale or sell through multiple channels.
A: Ecommerce retailers often start with spreadsheets, but those become limiting as operations grow. Platforms like Linnworks help centralize key operational data—syncing your inventory, sales volume, order fulfillment, and cost inputs in one place. This gives you real-time visibility into overhead trends without manual data wrangling.
A: These hybrid costs—like equipment maintenance or overtime—don’t always show up in monthly snapshots. Use historical production logs to identify when and why these costs spike, then break them into fixed and variable portions. Track them quarterly and adjust forecasts seasonally to avoid surprises during peak periods or high-output cycles.