Include purchasing, handling, storage, and insurance costs.
$
The total cost of raw materials expected for the period (Allocation Base).
Optional: Single Job Allocation
$
Material Overhead Rate
0.00%
Overhead Applied to Job
$0.00
What is Material Overhead Rate?
The Material Overhead Rate is a percentage used in cost accounting to allocate indirect material costs to products based on their direct material consumption. Unlike direct materials (like wood in furniture or steel in automotive), indirect costs cannot be easily traced to a specific unit of production. These include costs related to procurement, material handling, warehousing, quality inspection, and insurance on inventory.
Calculating this rate ensures that the true cost of inventory is captured. Without allocating overhead, a company might underprice its products by only accounting for the raw purchase price of materials, ignoring the substantial costs incurred to get those materials into production.
The Formula
The standard formula for calculating the predetermined material overhead rate is:
Material Overhead Rate = (Total Estimated Material Overhead Costs / Total Estimated Direct Material Costs) × 100
Where:
Total Estimated Material Overhead Costs: The sum of all indirect costs related to materials for the upcoming period (e.g., purchasing department salaries, forklift depreciation, warehouse rent).
Total Estimated Direct Material Costs: The total expected spend on raw materials for the same period. This serves as the "allocation base."
How to Use This Calculator
Estimate Overhead Pool: Enter the total budgeted indirect costs related to materials for the year or accounting period.
Estimate Allocation Base: Enter the total budgeted direct material costs for the same period.
Calculate Rate: The tool will generate a percentage. If the rate is 15%, it means for every $1.00 spent on raw materials, you incur $0.15 in overhead.
Apply to Jobs (Optional): Enter the direct material cost of a specific job or batch to see how much overhead should be capitalized into that inventory.
Example Calculation
Consider a manufacturing company, Precision Parts Inc., preparing their budget for the year:
Indirect Costs: They estimate $50,000 for warehouse staff, $20,000 for purchasing agents, and $10,000 for spoilage. Total Overhead = $80,000.
Direct Costs: They expect to purchase $400,000 worth of raw steel and aluminum.
Using the formula:
($80,000 / $400,000) × 100 = 20%
If they start a specific job (Job #101) requiring $5,000 of steel:
Applied Overhead: $5,000 × 20% = $1,000.
Total Material Cost recorded for Job #101: $5,000 (Direct) + $1,000 (Overhead) = $6,000.
Why is this Important?
1. GAAP Compliance
Generally Accepted Accounting Principles (GAAP) require that inventory be recorded at its full cost, which includes the cost to prepare it for sale. Excluding overhead results in expensing costs too early rather than matching them with revenue when the product is sold.
2. Accurate Pricing
If a business ignores material overhead, they might mark up their products based solely on direct costs. This can lead to selling products at a loss effectively, as the costs of warehousing and purchasing are not being covered by the sales price.
3. Performance Evaluation
Tracking this rate over time helps management see if the purchasing or warehousing departments are becoming less efficient. A rising rate (e.g., going from 10% to 15%) suggests that indirect costs are rising faster than the volume of materials being purchased.
function calculateMaterialOverhead() {
// Get input values
var indirectCostsStr = document.getElementById('totalIndirectCosts').value;
var directBaseStr = document.getElementById('totalDirectMaterialBase').value;
var specificJobStr = document.getElementById('specificJobCost').value;
// Parse values
var indirectCosts = parseFloat(indirectCostsStr);
var directBase = parseFloat(directBaseStr);
var specificJobCost = parseFloat(specificJobStr);
// Validation
if (isNaN(indirectCosts) || isNaN(directBase)) {
alert("Please enter valid numbers for both Estimated Overhead Costs and Direct Material Costs.");
return;
}
if (directBase === 0) {
alert("Total Direct Material Costs (Allocation Base) cannot be zero.");
return;
}
// Calculate Rate
var rate = (indirectCosts / directBase) * 100;
// Display Rate
document.getElementById('resultsArea').style.display = 'block';
document.getElementById('displayRate').innerHTML = rate.toFixed(2) + "%";
var explanationText = "For every $1.00 spent on direct materials, $" + (rate / 100).toFixed(2) + " is incurred in overhead costs.";
document.getElementById('displayExplanation').innerHTML = explanationText;
// Calculate Specific Job Allocation (if input provided)
var jobContainer = document.getElementById('jobResultContainer');
if (!isNaN(specificJobCost) && specificJobCost > 0) {
var appliedOverhead = specificJobCost * (rate / 100);
var totalJobCost = specificJobCost + appliedOverhead;
// Format currency
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
});
document.getElementById('displayAppliedOverhead').innerHTML = formatter.format(appliedOverhead);
document.getElementById('displayTotalJobCost').innerHTML =
"Total Material Cost (Direct + Overhead): " + formatter.format(totalJobCost) + "";
jobContainer.style.display = 'block';
} else {
jobContainer.style.display = 'none';
}
}