Sum of rent, utilities, depreciation, indirect labor, etc.
Total hours worked by direct production staff.
Overhead Rate
$0.00 / hr
For every hour of direct labor, you spend $0.00 in overhead costs.
function calculateOverheadRate() {
// Get inputs by ID
var overheadInput = document.getElementById("totalOverheadCost").value;
var laborHoursInput = document.getElementById("totalDirectLaborHours").value;
var resultDiv = document.getElementById("calculationResult");
var resultRate = document.getElementById("resultRate");
var resultRateText = document.getElementById("resultRateText");
var errorDiv = document.getElementById("errorDisplay");
// Clear previous errors
errorDiv.style.display = "none";
resultDiv.style.display = "none";
// Parse values
var overhead = parseFloat(overheadInput);
var hours = parseFloat(laborHoursInput);
// Validation logic
if (isNaN(overhead) || isNaN(hours)) {
errorDiv.innerHTML = "Please enter valid numeric values for both fields.";
errorDiv.style.display = "block";
return;
}
if (overhead < 0 || hours < 0) {
errorDiv.innerHTML = "Values cannot be negative.";
errorDiv.style.display = "block";
return;
}
if (hours === 0) {
errorDiv.innerHTML = "Total Direct Labor Hours cannot be zero (division by zero).";
errorDiv.style.display = "block";
return;
}
// Calculation Logic: Overhead Rate = Total Overhead Costs / Total Direct Labor Hours
var rate = overhead / hours;
// Display Results
var formattedRate = "$" + rate.toFixed(2);
resultRate.innerHTML = formattedRate + " / hr";
resultRateText.innerHTML = formattedRate;
resultDiv.style.display = "block";
}
How to Calculate Overhead Rate per Direct Labor Hour
Calculating the overhead rate per direct labor hour is a critical process in cost accounting, particularly for manufacturing businesses and service providers who rely heavily on labor. This metric allows businesses to allocate indirect costs (overhead) to specific products or services based on the amount of time employees spend working on them.
By determining this rate, a company can ensure that the price of their product covers not just the materials and labor required to make it, but also the rent, utilities, and administrative costs necessary to run the facility.
The Overhead Rate Formula
The standard formula for calculating the overhead allocation rate based on direct labor hours is:
Overhead Rate = Total Indirect Manufacturing Costs / Total Direct Labor Hours
Total Indirect Costs (Overhead): These are costs that cannot be traced directly to a specific product. Examples include factory rent, electricity, machine depreciation, property taxes, and salaries of supervisors (indirect labor).
Total Direct Labor Hours: This is the sum of all hours worked by employees who are directly involved in the manufacturing or production process during the period.
Real-World Example Calculation
Let's assume a custom furniture workshop wants to determine their overhead rate for the upcoming fiscal year to price their dining tables correctly.
Step 1: Estimate Overhead Costs
The company sums up all indirect expenses:
Workshop Rent: $24,000
Utilities: $6,000
Equipment Depreciation: $5,000
Supervisor Salary: $45,000
Total Overhead: $80,000
Step 2: Calculate Direct Labor Hours
The workshop employs 2 carpenters. Each carpenter works 2,000 hours per year.
2 Carpenters × 2,000 Hours = 4,000 Total Direct Labor Hours
Step 3: Apply the Formula
Using the calculator above or manual math:
$80,000 (Overhead) ÷ 4,000 (Hours) = $20.00 per Direct Labor Hour
This means for every hour a carpenter spends building a table, the company must add $20.00 to the cost calculation to cover the workshop's bills.
Why This Metric Matters
Failing to calculate the overhead rate accurately can lead to underpricing. If the furniture shop in the example above only charged for wood and the carpenter's hourly wage, they would eventually run out of money to pay the rent and utilities. By allocating $20 per hour for overhead, they ensure all business expenses are absorbed by the revenue generated from sales.
When to Use Direct Labor Hours as a Base
Allocating overhead based on direct labor hours is most effective when:
The production process is labor-intensive rather than machine-intensive.
There is a strong correlation between the number of hours worked and the overhead costs incurred.
Direct labor constitutes a significant portion of total production costs.
If your business is highly automated, you might consider using machine hours as your allocation base instead.