How to Calculate Fixed Overhead Rate

by

Fixed Overhead Rate Calculator

Sum of all fixed indirect costs (Rent, Insurance, Salaries, etc.)
Direct Labor Hours Machine Hours Units Produced Direct Labor Cost ($)
Total hours, units, or dollars used as the denominator

Calculation Result

Understanding the Fixed Overhead Rate

The fixed overhead rate is a financial metric used by manufacturers and service providers to allocate indirect production costs to specific products or services. Unlike variable costs, fixed overhead costs—such as factory rent, depreciation, and administrative salaries—do not change regardless of how many units you produce. Calculating this rate is essential for accurate product costing, pricing strategies, and financial reporting.

The Fixed Overhead Rate Formula

Fixed Overhead Rate = Total Fixed Overhead Costs / Total Allocation Base

Step-by-Step Calculation Guide

  1. Identify Total Fixed Costs: Gather all costs that remain constant during the period. This typically includes factory rent, property taxes, equipment insurance, and salaries for non-production staff.
  2. Select an Allocation Base: Choose a metric that best reflects the consumption of overhead. Common bases include Machine Hours (for automated plants), Direct Labor Hours (for manual assembly), or Units Produced.
  3. Determine Total Volume: Estimate or measure the total volume of your chosen base for the period.
  4. Divide: Divide the total costs by the total volume to find the rate per hour or per unit.

Practical Example

Imagine a furniture company with the following monthly figures:

  • Total Fixed Costs: $12,000 (Rent + Insurance)
  • Allocation Base: Machine Hours
  • Total Machine Hours: 1,500 hours

Calculation: $12,000 / 1,500 hours = $8.00 per machine hour.

In this scenario, for every hour a machine runs to build a table, the company must allocate $8.00 to account for the fixed overhead costs.

Why This Matters for SEO and Business

Properly calculating fixed overhead is a cornerstone of absorption costing. If your rate is too low, you may underprice your products and lose money. If it's too high, your products might become uncompetitive in the market. Consistent monitoring of these rates helps businesses identify inefficiencies and improve profit margins over time.

function calculateFixedOverhead() { var fixedCosts = document.getElementById('totalFixedCosts').value; var allocationBase = document.getElementById('baseType').value; var quantity = document.getElementById('allocationQuantity').value; var resultBox = document.getElementById('overheadResultBox'); var resultText = document.getElementById('overheadResultText'); var interpretationText = document.getElementById('overheadInterpretation'); // Convert to numbers var costsNum = parseFloat(fixedCosts); var quantityNum = parseFloat(quantity); // Validation if (isNaN(costsNum) || costsNum < 0) { alert("Please enter a valid amount for Total Fixed Costs."); return; } if (isNaN(quantityNum) || quantityNum <= 0) { alert("Total Quantity of Allocation Base must be a positive number."); return; } // Calculation var rate = costsNum / quantityNum; var formattedRate = rate.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 4 }); // UI Update resultBox.style.display = "block"; if (allocationBase === "Direct Labor Cost") { var percentageRate = (rate * 100).toFixed(2); resultText.innerHTML = percentageRate + "% of Direct Labor Cost"; interpretationText.innerHTML = "For every $1 spent on direct labor, you should allocate $" + rate.toFixed(2) + " in fixed overhead."; } else { resultText.innerHTML = "$" + formattedRate + " per " + allocationBase; interpretationText.innerHTML = "This means for every single " + allocationBase.toLowerCase() + " used in production, you incur $" + formattedRate + " in fixed indirect costs."; } // Smooth scroll to result resultBox.scrollIntoView({ behavior: 'smooth', block: 'nearest' }); }

Leave a Comment