Overhead Rate Calculator
Calculate the overhead rate from total overhead costs and an allocation base such as direct labor or machine hours.
Last reviewed by the Radiatus Cloud team
Calculate the overhead rate to allocate indirect costs to products or jobs.
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Calculate the overhead rate
The overhead rate is used to allocate indirect costs, such as rent, utilities, administration and equipment, to the products or jobs that generate them. It is calculated by dividing total overhead costs by an allocation base, which is a measure of activity like direct labour cost, labour hours or machine hours. If overhead is one hundred twenty thousand and direct labour is three hundred thousand, the overhead rate is forty percent, meaning forty cents of overhead is applied for every dollar of direct labour.
Choosing an allocation base that genuinely drives overhead gives the most accurate costing.
Why overhead allocation matters
Overhead costs cannot be traced directly to a single product, yet they must be recovered through pricing to make a profit. The overhead rate spreads these costs fairly across output, giving a fuller picture of what each product or job truly costs. This is essential for accurate pricing, bidding on contracts and judging profitability, since ignoring overhead makes products look more profitable than they are.
The chosen allocation base should reflect what actually causes overhead to be incurred; labour-based bases suit labour-intensive work, while machine hours suit automated production. Review the rate regularly as costs and activity change. All calculation happens locally in your browser.
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Frequently Asked Questions
What is the overhead rate formula?
It is total overhead costs divided by the allocation base, such as direct labour cost or hours, often expressed as a percentage.
What is an allocation base?
It is a measure of activity, like direct labour cost, labour hours or machine hours, used to spread overhead across products or jobs.
Why allocate overhead at all?
Overhead must be recovered through pricing. Allocating it shows the true cost of each product, which is vital for pricing and profitability.
How do I choose the allocation base?
Pick the base that best drives overhead: labour for labour-intensive work, machine hours for automated production, so costs are assigned fairly.
How often should I update the rate?
Review it regularly, at least annually or when costs or activity levels change significantly, to keep product costing accurate.
Privacy & Security
Everything runs in your browser; nothing is uploaded.
How to Use
Enter total overhead and the allocation base amount.
Disclaimer: This tool is provided "as is" without warranty of any kind. Results are for educational and utility purposes.
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