How to Calculate a Charge-Out Rate

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A charge-out rate is a method of allocating costs among multiple users of a resource. Typically, charge-out rates are used as a pricing technique for business services. For example, a plumber usually charges parts and labor, where labor cost is a charge-out rate that assigns labor and overhead expenses to customers on a “chargeable hours” basis.

Charge-Out Rate Pricing

There’s no “one size fits all” formula for charge-out rates, because business services vary greatly, but there are generally applicable parameters. Start by determining chargeable hours, which is time spent providing direct services to customers. Suppose you run a plumbing business. Full-time employees may work about 2,000 hours a year, but when you deduct vacations, holidays, sick leave and time spent doing tasks other than providing services to customers, there may be only 1,000 chargeable hours. Calculate annual labor cost, including wages, benefits and taxes. Add overhead costs and an allowance for profit. In this example, you would exclude the cost of materials, for which plumbers usually charge separately. Divide the total by total chargeable hours per year to arrive at a charge-out rate. This is the price per hour you charge customers.

Charge-Out Cost Allocation

Organizations sometimes use charge-out rates to allocate shared assets among departments. For example, a university may maintain a centralized data processing facility. For accounting purposes, the costs of the data processing center can be charged out to the departments that utilize this resource.

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