How to Calculate Cost Rates

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A rate is a ratio of two different amounts. It is expressed in either a percentage or decimal form. The most common rates tell us how long it takes to do something—for instance, miles per hour or something per minute. Rates are particularly helpful in measuring distances or costs. From a business perspective, cost containment is very important. Cost rates are usually calculated based on time, distance or products; that is, cost per widget, cost per hour, cost per mile.

Determine which type of cost you would like to compare or get more information about. Rates are used to compare and measure. The two main types of costs are fixed (occurs regardless of sales activity) and variable (dependent on sales).

Identify the amount associated with cost line items. Knowing whether or not the cost is variable or fixed will help to determine how to calculate the rate. Common fixed costs are administrative labor, rents and utilities. Common variable costs are inventory and direct labor.

Sum all costs and divide by a denominator like time, distance or sale for an insightful rate. For instance, the rate of fixed costs per hour or kilometer might be $500 fixed costs per hour. This is the same for variable costs which can be variable costs per minute or mile. Ultimately, the rate depends on the cost.

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