This page is for a merchandiser, a costing clerk, or a factory owner who has to work out each order's fair share of costs that are not spent on any one order alone: rent, electricity, and management salaries. At work, a factory rarely runs one order at a time. Delta Garments makes Order A for export while also running Make to Stock orders for Cedar & Co., its domestic buyer. This lesson mainly teaches the money flow: it shows how a single shared overhead pool is split fairly across several orders, using an allocation base such as pieces produced, instead of guessed or equal shares.
A single order's own overhead component, such as Order A's USD 0.49 per piece, already assumes an even, planned share of the factory's running costs. Once a factory runs two or more orders side by side, Cedar & Co.'s domestic orders included, that overhead pool has to be divided between them in a way that is fair to each order, not simply repeated in full for every order at once. Without this skill, a factory cannot tell whether a smaller order is actually paying its own fair share of the roof over its head.
You need: the cost of goods sold structure from lesson T16-C04-L02, including how overhead sits inside it as one cost line. You do not need any accounting qualification.
By the end of this lesson you can:
Not covered here: adding every order in a month together into one business P&L (lesson T16-C04-L04), and building a complete order-and-business P&L sheet from a blank row (lesson T16-C04-L05).
| Term | Meaning |
|---|---|
| Overhead | A factory's running costs that are not fabric, trims or direct labour: rent, electricity, management salaries and similar costs, shared across all the pieces it makes. |
| Indirect cost | A cost that cannot be traced to one specific order alone, such as overhead, and must instead be shared across every order it supports. |
| Overhead allocation | Splitting a shared overhead pool across several orders in proportion to a chosen allocation base. |
| Allocation base | The measure used to split shared overhead fairly, such as pieces produced, machine hours, or order value. |
| Overhead pool | The total shared overhead cost for a period, before it is split across the orders that ran during it. |
| Hybrid business model | A factory's own combination of export orders and domestic orders running side by side, each tracked according to its own market's requirements. |
Overhead is an indirect cost: unlike fabric or making, it cannot be traced to one order alone, because rent, electricity and management salaries are spent to keep the whole factory running, not any single order. When only one order is in production, that order alone carries the full overhead pool. When two or more orders run at once, the pool must be split between them, and the fairest way to do that is to choose an allocation base, a measure of how much of the factory's capacity each order actually used, and divide the pool in that same proportion. Pieces produced is the simplest allocation base and the one this lesson uses; machine hours and order value are two others a factory may use instead.
A merchandiser meets several different shapes of this same allocation question across a normal season, and learning to recognise each one prevents a smaller order from being charged an unfair share of shared cost.
| What can differ | The shapes you will meet | Why it matters |
|---|---|---|
| Domestic Make to Stock orders of different sizes | Cedar & Co. runs a 15,000-piece order alongside a smaller 7,500-piece order, both through Delta Garments at the same time. | Splitting overhead equally between the two, instead of by size, would overcharge the smaller order and undercharge the larger one. |
| Export order running alongside domestic orders | Delta Garments runs Order A for Northline Apparel in the same period as Cedar & Co.'s domestic orders. | The same overhead pool and the same allocation method apply across export and domestic orders alike; the market does not change how overhead is shared. |
| Allocation base chosen as pieces versus order value | A factory could split overhead by pieces produced or by each order's own revenue instead. | Pieces produced favours orders using less overhead-heavy processes; order value can distort the split if orders differ a lot in price per piece. |
| Make to Order versus Make to Stock | Order A only enters production once Northline Apparel confirms it; Cedar & Co.'s Make to Stock orders enter production against Cedar & Co.'s own forecast, before a shop sale exists. | A Make to Stock order still carries its own fair share of overhead the moment it enters production, even though no final sale has happened yet. |
Delta Garments runs two Make to Stock orders for Cedar & Co. in the same period: Order 1 at 15,000 pieces and Order 2 at 7,500 pieces, both priced at Order A's own equivalent value per piece for a like-for-like comparison. Each order's own planned overhead, at Order A's fixed rate of USD 0.49 per piece, would be USD 7,350 for Order 1 and USD 3,675 for Order 2 if each order were run alone. Run together, Delta Garments' combined overhead pool for the period is the sum of both, USD 11,025, and Mona must confirm that splitting it by pieces produced returns exactly those same two shares.
A common mistake is dividing a shared overhead pool into equal shares for every order running at once, instead of splitting it in proportion to an allocation base. Equal shares treat a 7,500-piece order the same as a 15,000-piece order, overcharging the smaller order and undercharging the larger one. A factory that prices its smaller domestic orders using an overcharged overhead share can conclude, wrongly, that small orders are not worth running, when the real problem is only how the overhead pool was split between them. What this costs a factory that gets it wrong is real: turning away profitable smaller orders because an unfair allocation method made them look unprofitable on paper costs a factory real revenue it could otherwise have kept.
A factory's rent, electricity and management salaries are not spent on any single order; they keep the whole factory running. When one order is in production, it carries the full cost alone. When several orders run at the same time, that shared cost has to be split between them fairly, using some measure of how much of the factory's capacity each order actually used, such as the number of pieces each order makes. Splitting it equally between a large order and a small order is unfair: it overcharges the smaller order and undercharges the larger one. Getting this wrong can make a genuinely profitable small order look unprofitable on paper, for no real reason.
Delta Garments' finance clerk splits the combined overhead pool of USD 11,025 equally between Cedar & Co.'s two orders, USD 5,512.50 each, regardless of their size. Under that split, Order 2, the smaller 7,500-piece order, shows a much thinner profit than Order 1, and the clerk suggests Cedar & Co.'s smaller orders may not be worth running in future.
Here is the note the finance clerk actually wrote:
Is the finance clerk's recommendation to decline smaller orders justified by this note? Decide before opening the answer.
No. Two facts in the clerk's own note decide this.
First, the equal split itself is the source of the problem. Order 2's own correctly allocated overhead, by pieces produced, is USD 3,675, not USD 5,512.50. The equal split overcharges Order 2 by USD 1,837.50 (5,512.50 - 3,675), which is exactly why it looks less profitable.
Second, Order 1 is undercharged by the same method. Order 1's own correct share is USD 7,350, not USD 5,512.50; the equal split understates Order 1's true overhead cost by the same USD 1,837.50.
The recommendation should be reversed: recalculate both orders' overhead by pieces produced before drawing any conclusion about whether Cedar & Co.'s smaller orders are worth running. The equal split, not the smaller order itself, is what made Order 2 look weak.
Using the two Cedar & Co. orders' own figures:
An equal overhead split would wipe out 94.2% of Order 2's own correctly planned profit on paper, close to making a genuinely profitable order look worthless. If that costing mistake led Delta Garments to decline future orders of Order 2's size from Cedar & Co., the real cost would be the lost revenue and profit of every order like it turned away for the wrong reason.
Open the course workbook's "Overhead allocation" sheet. It lists every order running in the period as a row, with its own pieces produced, and calculates each order's share of the combined overhead pool with a live formula based on its share of total pieces. Enter each order's pieces produced; the sheet allocates the overhead pool automatically, without any order's share being typed in by hand.
[Download the Order and business P&L sheet](../../templates/T16-C04-order-and-business-pl-sheet.xlsx)
1. Why can overhead not simply be charged in full to every order running at the same time?
2. A combined overhead pool of USD 11,025 is split between a 15,000-piece order and a 7,500-piece order by pieces produced. What is the smaller order's share?
3. Two domestic orders of 12,000 and 4,000 pieces share a combined overhead pool of USD 8,000, split by pieces produced. What is the 4,000-piece order's share?
| EN | AR | FR | TR | Meaning |
|---|---|---|---|---|
| Overhead | التكاليف العامة | Frais généraux | Genel giderler | A factory's running costs that are not fabric, trims or direct labour: rent, electricity, management salaries and similar costs, shared across all the pieces it makes. |
| Indirect cost | التكلفة غير المباشرة | Coût indirect | Dolaylı maliyet | A cost that cannot be traced to one specific order alone, such as overhead, and must instead be shared across every order it supports. |
| Overhead allocation | توزيع التكاليف العامة | Répartition des frais généraux | Genel gider dağıtımı | Splitting a shared overhead pool across several orders in proportion to a chosen allocation base. |
| Allocation base | أساس التوزيع | Base de répartition | Dağıtım esası | The measure used to split shared overhead fairly, such as pieces produced, machine hours, or order value. |
| Overhead pool | مجمع التكاليف العامة | Pool de frais généraux | Genel gider havuzu | The total shared overhead cost for a period, before it is split across the orders that ran during it. |
| Hybrid business model | نموذج عمل مختلط | Modèle économique hybride | Karma iş modeli | A factory's own combination of export orders and domestic orders running side by side, each tracked according to its own market's requirements. |
You now know how to allocate overhead across several orders running at once. The next lesson adds every order in a month together, along with the factory's own unallocated running costs, into one business P&L. Back to the course map