Overhead Recovery Rate Calculator
What is an Overhead Recovery Rate?
The Overhead Recovery Rate is a crucial accounting metric used by businesses to allocate indirect costs (overhead) to specific products, services, or projects. Since overhead costs—such as rent, utilities, and administrative salaries—cannot be directly traced to a single unit of production, companies use this rate to ensure they are pricing their goods high enough to cover all expenses and maintain profitability.
How to Calculate Overhead Recovery Rate
To find your recovery rate, you divide your total overhead expenses by a chosen activity base. The formula is:
Overhead Recovery Rate = (Total Overhead Costs / Total Allocation Base)
Common allocation bases include:
- Direct Labor Cost: Expressed as a percentage of labor dollars spent.
- Direct Labor Hours: Expressed as a dollar amount per hour worked by employees.
- Machine Hours: Used in highly automated environments where machine run-time is the primary cost driver.
Why This Metric Matters for Your Business
Failing to accurately calculate overhead recovery can lead to "under-recovery," where your business loses money on every sale despite appearing profitable on a gross margin level. Conversely, "over-recovery" might mean your prices are too high, making you uncompetitive in the market. By using an Overhead Recovery Rate Calculator, you can determine exactly how much extra must be added to the direct cost of every job to stay in the black.
Real-World Example
| Scenario | Overhead Cost | Base (Labor Hours) | Recovery Rate |
|---|---|---|---|
| Small Workshop | $50,000 | 2,000 Hours | $25.00 / hour |
| Manufacturing Plant | $500,000 | 10,000 Hours | $50.00 / hour |
Optimizing Your Recovery
Regularly reviewing your overhead recovery rate is essential. As your business scales, your overhead often becomes more "efficient," meaning your recovery rate per unit might decrease. However, if utility costs rise or you hire more administrative staff, you must adjust your rates immediately to protect your bottom line. Experts recommend recalculating this rate at least once a quarter or whenever a significant change in business structure occurs.