Overhead Rate Calculator
Calculate overhead rates for cost allocation
Overhead Formulas
Understanding Overhead Rates
Overhead rate allocates indirect costs to products, jobs, or departments. Indirect costs like rent, utilities, supervision, and depreciation can't be directly traced to specific products, so they're allocated using an overhead rate based on some activity measure.
Common allocation bases include direct labor hours, direct labor dollars, machine hours, or units produced. The choice depends on what best correlates with overhead consumption. Manufacturing uses machine hours; service businesses often use labor hours.
Accurate overhead allocation is essential for pricing, profitability analysis, and inventory valuation. Under-allocating overhead leads to under-pricing; over-allocating may make products uncompetitive. Many companies use Activity-Based Costing (ABC) for more precise allocation.
Types of Overhead
Manufacturing Overhead
Factory rent, utilities, equipment depreciation, indirect labor, supplies.
Administrative Overhead
Office rent, management salaries, accounting, HR, legal.
Selling Overhead
Marketing, advertising, sales salaries (sometimes separate from overhead).
Fixed vs Variable
Fixed overhead stays constant; variable overhead changes with activity.
Overhead Rates by Industry
| Industry | Common Base | Typical Rate | Notes |
|---|---|---|---|
| Manufacturing | Machine hours | 150-300% | Capital intensive |
| Construction | Labor cost | 50-80% | Labor-driven |
| Professional Services | Labor hours | $30-100/hr | People-based |
| Software Dev | Labor cost | 40-60% | Lower overhead |
| Healthcare | Patient visits | Varies | Activity-based |
Overhead Best Practices
Choose the Right Base
Match allocation base to cost driver. If overhead rises with machine usage, use machine hours.
Use Predetermined Rates
Calculate rates annually using budgeted figures. Adjust for actual vs applied overhead at year-end.
Consider ABC Costing
Activity-Based Costing uses multiple cost pools and drivers for more accurate allocation.
Track Variance
Compare applied to actual overhead. Large variances indicate rate needs adjustment.
Frequently Asked Questions
What's a predetermined overhead rate?
A rate calculated at the start of a period using estimated overhead and estimated activity. It allows consistent cost allocation throughout the year without waiting for actual figures. Adjust for variances at period end.
How do I handle under/over-applied overhead?
If applied overhead differs from actual, the variance is typically closed to COGS for small amounts or prorated among WIP, Finished Goods, and COGS for material amounts.
Should overhead include administrative costs?
For GAAP inventory costing, only manufacturing overhead is included in product costs. Administrative overhead is a period expense. However, for pricing and internal analysis, you may want full overhead allocation.
What's a plantwide vs departmental rate?
Plantwide uses one rate for the entire facility—simpler but less accurate. Departmental rates calculate separate rates for each department—more accurate when departments have different cost structures.
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