I just bought $1000 in materials for a cabinet job today. Not on that invoice (and I do get my wood 10% off retail) is the $30 in gas; five hours driving, selecting, and loading the wood; a portion of the flatbed trailer used to haul it; any interest on credit cards or accounts (not applicable here); and oh, that Check Engine light reminds me I need a $100 oxygen sensor in the work van.
Might also work back to the hours spent calculating bills of materials; sourcing the lumber; providing color samples; and so on. And the $65 just spent on printer ink.
None of that time ends up in the labor calculation. Yet these are real costs & need to be covered if your biz is to survive. Plenty of ways to address overhead, some more transparent than others.
You can mark up materials without telling the customer. Plumbers do this & it makes people mad when they see the same elbow at 1/3 cost in the store. Plumber often has good reason for the markup, but it looks shifty.
You can build overhead into your shop rate; that's one reason marinas charge $90 an hour for labor. Don't think the dude with the pressure washer is taking that much home.
You are paying for the dude, the pressure washer, the water bill, and so on. Tying overhead to labor hours means you'd better be good at time estimates. It can shift the total cost one way or the other drastically.
For my biz, I avoid hidden markups on materials & on labor rates. The client pays my delivered cost on materials. Labor is a flat hourly rate. "Overhead" appears as a separate line item: 35% of materials cost. When all is said & done & purchased, the clients are paying $700 in overhead costs for this job. Since I frequently misjudge how many hours a job will take (always to my detriment), at least tying overhead to materials ensures operational costs are met. If I eat the extra hours, I eat them. The business gets paid.
My clients seem to appreciate this transparency, but other businesses arrange markup in other ways which are equally valid. There are costs that are neither materials, nor labor, nor profit, nor taxes. They are still real costs & must be covered if a business is to live.