Determine how much indirect cost is applied to your production units or projects.
Calculation Result
Your Overhead Allocation Rate is:
Understanding Overhead Allocation Rates
In accounting, an overhead allocation rate is a calculation used to assign indirect costs to specific cost objects, such as manufactured goods or specific services. Because indirect costs (like rent, utilities, and administrative salaries) cannot be traced directly to a single product, businesses use an allocation base to distribute these costs fairly.
The Formula
The standard formula used by this calculator is:
Overhead Allocation Rate = Total Indirect Costs / Total Allocation Base
Common Allocation Bases
Direct Labor Hours: Used when production is highly manual.
Machine Hours: Used when production is highly automated.
Direct Labor Cost: Used if labor wages vary significantly between tasks.
Square Footage: Often used for facility-related costs like rent or heating.
Real-World Example
Imagine a furniture manufacturing company with the following data for a month:
Total Indirect Costs: $25,000 (Rent, Insurance, Manager Salaries)
Total Machine Hours: 5,000 hours
Using the calculator, the Overhead Allocation Rate would be $5.00 per machine hour. This means for every hour a machine runs to make a table, the company should add $5.00 of indirect cost to the table's total cost calculation.
Why It Matters for Your Business
Benefit
Description
Accurate Pricing
Ensures your selling price covers both direct and indirect expenses.
Profitability Analysis
Helps identify which products are actually making money after all costs are considered.
Budgeting
Allows for better forecasting of future overhead needs as production volume changes.
function calculateOverhead() {
var indirectCosts = document.getElementById("totalIndirectCosts").value;
var baseUnits = document.getElementById("allocationBase").value;
var resultBox = document.getElementById("resultBox");
var resultDisplay = document.getElementById("allocationResult");
var detailsDisplay = document.getElementById("resultDetails");
if (indirectCosts === "" || baseUnits === "" || parseFloat(baseUnits) === 0) {
alert("Please enter valid positive numbers. Allocation base cannot be zero.");
return;
}
var costs = parseFloat(indirectCosts);
var units = parseFloat(baseUnits);
if (isNaN(costs) || isNaN(units)) {
alert("Please enter numeric values.");
return;
}
var rate = costs / units;
// Formatting result to 2 decimal places
var formattedRate = rate.toLocaleString(undefined, {
minimumFractionDigits: 2,
maximumFractionDigits: 2
});
resultDisplay.innerText = "$" + formattedRate + " per unit";
detailsDisplay.innerText = "For every 1 unit of your allocation base, $" + formattedRate + " of indirect cost is applied.";
resultBox.style.display = "block";
resultBox.scrollIntoView({ behavior: 'smooth', block: 'nearest' });
}