Overhead Recovery Rate Calculator
Direct Labor Hours / Machine Hours
Direct Labor Cost ($) / Material Cost ($)
Calculated Recovery Rate
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How to Calculate Overhead Recovery Rate
The Overhead Recovery Rate (also known as the Overhead Absorption Rate or OAR) is a crucial metric in cost accounting. It is used to allocate indirect costs—such as rent, utilities, and administrative salaries—to specific products or services based on a measure of activity (the allocation base).
Accurately calculating this rate ensures that your pricing strategy covers not just direct costs (materials and labor) but also the hidden costs of running a business.
Overhead Recovery Rate = Total Overhead Costs / Total Allocation Base
Key Components
- Total Overhead Costs: The sum of all indirect expenses for a specific period (usually a year). This includes factory rent, depreciation on machinery, supervisor salaries, and electricity.
- Allocation Base: The driver used to assign these costs. Common bases include:
- Direct Labor Hours: Used when labor is the primary driver of production.
- Machine Hours: Used in highly automated manufacturing.
- Direct Labor Cost: Expressed as a percentage of wages paid.
Example Calculation
Imagine a custom furniture workshop with the following annual projections:
- Total Estimated Overhead: $120,000
- Total Estimated Direct Labor Hours: 4,000 hours
Using the formula:
$120,000 / 4,000 hours = $30.00 per direct labor hour
This means for every hour a carpenter spends building a table, the business must add $30.00 to the cost calculation to cover overhead expenses.
Interpreting the Results
If you calculate a rate based on hours, your result is a monetary value (e.g., $50/hour). You add this amount to your direct costs for every hour spent on a job.
If you calculate a rate based on cost (like Direct Labor Cost), your result is a percentage (e.g., 150%). This means if you pay a worker $100 for a job, you must allocate an additional $150 (150% of $100) to cover overhead.