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.