How to Find Overhead Rate
Manufacturing and production companies spend copious amounts of time tracking costs necessary to create finished goods. One of three manufacturing costs tracked includes overhead. This includes all incidental costs that are indirectly necessary to produce goods. Common examples include utilities, equipment or facilities depreciation, minor production supplies and indirect production personnel. All costs need to have some impact on the company's production process. A common overhead allocation process is to use a predetermined overhead rate to apply these costs to each item produced.
Other People Are Reading
Instructions
-
-
1
Estimate upcoming annual overhead expenses using previous year's figures. For example, look at last year's expenditures for all indirect or overhead production costs.
-
2
Add a percentage to last year's figures to account for cost inflation or increases in costs due to higher production output.
-
-
3
Total all estimated overhead costs. This represents the total expected overhead expense for the entire production process.
-
4
Compute the estimated production output for the upcoming year. The number should be an accurate reflection of what the company can manufacture under normal standards.
-
5
Divide total estimated overhead costs by the expected production output. This presents a predetermined overhead rate for the upcoming year. Accountants typically apply this figure to goods produced.
-
1
Tips & Warnings
Companies may break down overhead costs into variable and fixed groups. The former changes as production input changes. The latter group does not. While not a necessity, separating costs into these groups can provide more analysis into the types of overhead production costs necessary to manufacture goods.
