Calculate the manufacturing overhead rate by dividing total overhead by the allocation base. Essential for job costing and pricing.
The overhead rate is the ratio of total manufacturing overhead to the total allocation base. It tells you how much overhead cost is applied for each unit of the allocation base — typically expressed as dollars per direct labor hour, per machine hour, or as a percentage of direct labor cost.
Manufacturers use overhead rates to apply costs to jobs and products in real time, rather than waiting until the end of the period when actual overhead is known. A predetermined overhead rate, calculated from budgeted figures at the start of the year, enables timely cost estimates for quoting, pricing, and profitability tracking throughout the period.
This calculator divides your total manufacturing overhead by the total allocation base to produce the overhead rate. You can use it with any allocation base — hours, dollars, units, or machine cycles — to get the rate that fits your costing system.
Precise measurement of this value supports data-driven planning and helps manufacturing professionals make informed decisions about resource allocation and process optimization strategies.
An accurate overhead rate ensures every job absorbs the right amount of shared factory costs. Without it, product costs are incomplete, quotes are inaccurate, and profitability analysis is unreliable. The overhead rate bridges the gap between indirect costs and individual products. Consistent measurement creates a reliable baseline for tracking improvements over time and demonstrating return on investment for process optimization initiatives.
OH Rate = Total Manufacturing Overhead / Total Allocation Base Applied OH for a job = OH Rate × Job's Allocation Base Usage
Result: $20.00 per hour
Total overhead of $240,000 divided by 12,000 direct labor hours gives an overhead rate of $20.00 per direct labor hour. A job using 50 direct labor hours would absorb 50 × $20 = $1,000 in overhead.
At the beginning of the fiscal year, estimate total manufacturing overhead and the total expected allocation base. Divide overhead by the base to get the predetermined rate. This rate is used throughout the year to apply overhead to production in a consistent, timely manner.
A single plant-wide rate is simple but may misallocate costs if departments differ in cost structure. Computing separate rates for each department — machining, assembly, finishing — using department-specific bases provides more accurate product costing.
Jobs quoted with an inflated overhead rate may price you out of the market. Jobs quoted with a rate that's too low leave money on the table. Regular benchmarking of your overhead rate against industry standards helps ensure your costing and pricing remain competitive.
A predetermined rate uses budgeted overhead and budgeted activity at the start of the period. An actual rate uses real numbers calculated at period end. Predetermined rates enable timely cost estimates; actual rates provide final accuracy.
Use the base that best reflects how overhead is consumed. Machine-intensive shops often use machine hours. Labor-intensive operations use direct labor hours. Some companies use direct labor cost as a percentage base. The goal is a strong correlation between the base and overhead spending.
Differences between budgeted and actual overhead spending, and between budgeted and actual activity levels, cause over- or under-application. If actual overhead is less than applied, overhead is over-applied. If more, it's under-applied.
Predetermined rates are typically set once per year to provide consistency. However, if conditions change dramatically — a plant closure, major equipment purchase, or significant volume shift — updating the rate mid-year may be warranted.
Higher volume spreads fixed overhead over more units of the base, lowering the rate. Lower volume concentrates fixed overhead, raising the rate. This is why overhead rates can vary significantly between high-volume and low-volume periods.
In practice, yes. Burden rate is an older term for the overhead rate, particularly in job shop environments. Both refer to the rate at which overhead costs are applied to production based on an allocation base.