Overhead Burden Rate Calculator
How to Calculate Overhead Burden Rate
The overhead burden rate (also known as the factory overhead rate or manufacturing burden) is a crucial accounting metric that helps businesses allocate indirect costs to direct production costs. By calculating this rate, companies can understand the true cost of their products or services beyond just raw materials and direct wages.
The Overhead Burden Rate Formula
The standard formula for calculating the overhead burden rate is:
Burden Rate = (Total Indirect Costs / Total Direct Costs) × 100
Where:
- Total Indirect Costs: Expenses that cannot be directly traced to a specific product (e.g., rent, utilities, insurance, supervisor salaries).
- Total Direct Costs: Usually Direct Labor Costs or Direct Machine Hours. This calculator uses Direct Labor Cost as the allocation base, which is the most common method for labor-intensive industries.
Step-by-Step Calculation Example
Imagine a furniture manufacturing shop with the following annual financials:
- Indirect Labor (Supervisors): $150,000
- Rent & Utilities: $50,000
- Insurance & Supplies: $25,000
- Total Direct Labor (Carpenters): $400,000
Step 1: Sum the Indirect Costs
$150,000 + $50,000 + $25,000 = $225,000 (Total Overhead)
Step 2: Divide by Direct Labor
$225,000 / $400,000 = 0.5625
Step 3: Convert to Percentage
0.5625 × 100 = 56.25%
This means for every $1.00 spent on direct labor, the company incurs an additional $0.56 in overhead costs.
Why is the Burden Rate Important?
Understanding your burden rate is essential for accurate pricing. If you only price your products based on direct materials and direct labor, you will likely operate at a loss because you are ignoring the facility, administration, and support costs required to run the business. A high burden rate may indicate inefficiencies in overhead spending or underutilization of the production capacity.