Overhead Absorption Rate Calculator
Determine how to allocate indirect costs to your production units or services.
Direct Labor Hours
Machine Hours
Units Produced
Direct Labor Cost ($)
Square Footage
The calculated Overhead Absorption Rate (OAR) is:
What is the Overhead Absorption Rate (OAR)?
The Overhead Absorption Rate (OAR) is a manufacturing accounting metric used to allocate indirect costs—such as rent, utilities, and administrative salaries—to the specific products or services a company produces. Since indirect costs cannot be traced directly to a single unit, the OAR provides a systematic way to ensure every product carries its fair share of the factory's operating expenses.
Overhead Absorption Rate = Total Budgeted Overheads / Total Budgeted Allocation Base
How to Use This Calculator
To use the Overhead Absorption Rate calculator, follow these steps:
- Total Budgeted Overheads: Enter the total sum of all indirect manufacturing costs planned for the period.
- Allocation Base Type: Choose the metric that best drives your costs. For automated factories, "Machine Hours" is common. For manual assembly, "Direct Labor Hours" is usually preferred.
- Total Quantity: Enter the total expected number of hours, units, or dollars for that base.
Why OAR Matters for Your Business
Accurate OAR calculation is vital for several reasons:
- Pricing Accuracy: If you under-absorb overheads, your selling price might be too low to cover actual costs, leading to losses.
- Inventory Valuation: Financial reporting standards require overheads to be included in the value of work-in-progress and finished goods.
- Budgeting: It helps managers predict future costs based on planned activity levels.
Real-World Example
Imagine a furniture company with budgeted monthly overheads of $20,000 (factory rent, electricity, and insurance). They expect to use 1,000 machine hours during the month.
Calculation: $20,000 / 1,000 Machine Hours = $20 per machine hour.
If a specific dining table takes 5 machine hours to build, the company will "absorb" $100 ($20 x 5) of overhead into the cost of that table.