A business selling more than one product or service line needs a fair way to split shared overhead — office rent, admin salaries, shared software — across everything it supports, rather than assuming every line carries an equal share.
Common allocation methods
- By revenue share — each product absorbs overhead proportional to how much revenue it generates
- By direct labor or production time — useful when products require meaningfully different amounts of hands-on work
- By space or resource usage — relevant when products physically occupy different amounts of storage, equipment time, or facility space
Why the method you pick matters
Allocating purely by revenue share can make a high-revenue, low-effort product look artificially less profitable, while a labor-intensive but lower-revenue product looks artificially more profitable — the wrong allocation method can genuinely mislead which products to prioritize.
A practical starting point
Pick the allocation method that best reflects what’s actually driving your overhead costs for your specific business, rather than defaulting to revenue share simply because it’s the easiest number to pull.
Three common allocation methods
- Revenue-based: allocate overhead in proportion to each product’s share of total revenue. Simple, but can overload high-revenue, low-complexity products.
- Unit-based: total overhead ÷ total units sold across the business, applied evenly per unit. Works well when products are fairly similar in size and complexity.
- Labor or resource-hour-based: allocate based on how much production or service time each product actually consumes. More accurate for businesses with products that vary widely in complexity, but requires tracking time per product.
A worked example
Monthly overhead is $12,000. Product A generates $30,000 in revenue and takes 2 hours of labor per unit; Product B generates $10,000 in revenue and takes 6 hours per unit. Revenue-based allocation gives Product A $9,000 of overhead and Product B $3,000. Labor-hour-based allocation, if Product A used 200 labor hours and Product B used 300 hours that month, gives Product A $4,800 and Product B $7,200 — the opposite conclusion. Revenue-based allocation would make Product B look far more profitable than it actually is, since it consumes disproportionately more of the business’s time and resources per dollar of revenue.
Common mistakes
- Defaulting to revenue-based allocation for every business, when a labor- or resource-based method would more accurately reflect which products are actually cheap or expensive to support.
- Allocating overhead once a year using stale revenue or time figures instead of updating it as the product mix shifts.
- Not revisiting the allocation method when a new, resource-heavy product is added to the lineup.
About the Author
Oliver K.G.
Oliver K.G. has 8+ years in pricing strategy and has helped 200+ Amazon FBA sellers, dropshippers, and small business owners optimise their profit margins. He built BizMargin to make gross margin and pricing calculations instant and free. He writes on pricing strategy, gross margin optimisation, and profitability for e-commerce and retail businesses.