Overhead Recovery Rate Calculator
Calculate how much indirect cost should be allocated to your production units or projects.
Calculated Recovery Rate
What is the Overhead Recovery Rate?
The Overhead Recovery Rate is a vital accounting metric used to allocate indirect manufacturing costs (overhead) to the specific products, services, or projects a company produces. Unlike direct costs like raw materials, overhead costs such as rent, utilities, and administrative salaries cannot be easily traced to a single unit. Therefore, businesses use a recovery rate to ensure every sale covers its share of the company's "back-office" expenses.
How to Calculate the Overhead Recovery Rate
The standard formula for calculating the overhead recovery rate is:
Overhead Recovery Rate = Total Estimated Overhead Costs / Total Allocation Base
The "Allocation Base" is the activity level that drives the overhead costs. Common bases include:
- Direct Labor Hours: Used when production is manual and labor-intensive.
- Machine Hours: Common in automated manufacturing where machine time drives costs.
- Direct Labor Cost: Used when overhead is closely related to the wages paid to workers.
- Units of Production: Used when a company produces a single, uniform product.
Practical Example
Suppose a custom furniture shop has $120,000 in annual overhead costs (rent, insurance, management). They expect their team to work 6,000 direct labor hours this year.
Calculation: $120,000 / 6,000 hours = $20.00 per hour.
This means for every hour a carpenter spends on a project, the business must add $20.00 to the price to "recover" its overhead costs.
Why Accuracy Matters
Underestimating your overhead recovery rate leads to "under-applied overhead," meaning your business is losing money on every unit sold because you aren't covering your fixed costs. Overestimating leads to "over-applied overhead," which might make your prices too high and cause you to lose customers to more competitive bidders.