How to Calculate Overhead Rates in Manufacturing
“Overhead” is the term used in business to refer to indirect costs, meaning those expenses not directly related to the business operation. In manufacturing, all costs other than production, labor and materials are usually classified as overhead. The overhead rate measures the level of production activity. It is calculated using the overhead expenses for a convenient period (such as a month) and an indicator of the level of production for the same period. The indicator most often used is production labor cost. The lower the overhead rate the less money must be allocated per unit produced for overhead expenses.
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Instructions
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Determine total overhead expenses for the selected period. Include rent, utilities, and administrative costs. Manufacturing operation expense is considered overhead unless it is for purchasing materials or goes for production labor pay and benefits.
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Calculate the total production labor expense for the selected period. Include wages and benefits, but do not include salaries for administrative staff, non-production workers, or management (except shop supervisors).
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Divide total overhead expenses by total labor cost to find the overhead rate for manufacturing. For example, if the total overhead for a month is $75,000 and the total labor cost equals $125,000, the overhead rate is equal to $75,000/$125,000, or 0.60.
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