How to use the overhead rate calculator
- Enter the total overhead for the period, such as a month or a year. This is the cost you cannot charge directly to one job, for example rent, utilities, insurance and supervision.
- Choose the allocation base you want to spread it over: direct labor hours, direct labor cost, machine hours or units produced.
- Enter the total of that base for the same period. Use hours or units for the hour and unit bases, and dollars of direct labor for the cost base.
- Optionally enter the amount of the same base for one job or batch to see how much overhead it carries. Read the rate and the applied amount in the results.
Formula
Overhead rate = total overhead / total allocation base
With a labor cost base, the rate is shown as a percent: overhead / direct labor cost x 100%
Overhead applied to a job = overhead rate x the job's amount of the same base
The allocation base is a choice, not a fact. The same overhead gives a different job cost under each base, and the tool reports the arithmetic for the one you pick.
$20,000 of overhead over 2,000 direct labor hours
A shop has $20,000 of overhead for the quarter and its workers put in 2,000 direct labor hours. The rate is $20,000 / 2,000 = $10.00 per direct labor hour. A job that took 150 labor hours carries 150 x $10.00 = $1,500.00 of overhead.
Spread the same overhead over direct labor cost instead. If direct labor cost $40,000, the rate is $20,000 / $40,000 = 50% of direct labor cost, and a job with $4,000 of direct labor carries $2,000. Choose the base that best follows how your overhead is used, and keep it the same from period to period.
Choosing an allocation base
Overhead has to be shared somehow, and the base is the yardstick. Direct labor hours work when people drive most of your overhead. Direct labor cost works when pay rates differ a lot between jobs. Machine hours suit shops where equipment time is the scarce resource, and units produced is the simplest choice when every unit is alike.
Nothing in the arithmetic tells you which base is correct. Try the same figures under two bases and compare the job costs. If they differ a lot, the base matters for your pricing, and it is worth thinking about which one follows your real costs.
Using the rate in pricing
Once you have a rate, add the overhead applied to a job's direct materials and direct labor to get its full cost. The cost plus pricing calculator then adds a markup, and the break even calculator shows how many units cover fixed costs. For the direct side of the picture, see the cost of goods sold calculator.
Period matters. Use overhead and base totals from the same period, and revisit the rate when costs or volume change. A rate built on a busy month will understate overhead in a slow one.
Assumptions and limits
- Overhead and the allocation base cover the same period.
- One rate is applied to every job. Departments with different rates are not modeled.
- The choice of base is yours and the tool does not judge it.
- Accounting standards, tax treatment and under or over applied overhead are not modeled.
Frequently asked questions
What is an overhead rate?
It is total overhead divided by an allocation base such as direct labor hours. It tells you how much overhead to add for each unit of that base.
How do I calculate overhead per labor hour?
Divide your total overhead by the total direct labor hours worked in the same period. With $20,000 and 2,000 hours the answer is $10.00 per hour.
Which allocation base should I use?
Use the measure that follows how your overhead is used. Labor hours suit people heavy work, machine hours suit equipment heavy work, and units suit uniform products. The tool does not choose for you.
Why is the labor cost rate shown as a percent?
Dividing overhead by labor dollars gives a ratio with no unit. Showing it as a percent of direct labor cost, such as 50%, is the usual way to read it.