How to Calculate the Overhead With a Given Overhead Allocation Rate
A company must allocate costs -- such as direct material costs, direct labor costs and overhead -- to the products it manufactures. Costs like direct material costs can be directly allocated to a single unit of a product, such as the use of $1 of metal per product -- but overhead is an indirect cost. Overhead consists of manufacturing costs, including electricity to run equipment and supplies used in a factory. Determine the amount of overhead to allocate to a particular amount of products manufactured using an overhead allocation rate.
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Instructions
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Determine the base to which you will apply a given overhead allocation rate. The base could be each unit manufactured or each direct labor hour. For example, assume you apply an overhead allocation rate to each machine-hour used when manufacturing products.
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Determine the amount of the base to which you will apply the given overhead allocation rate. In the example, assume you used 100 machine-hours to make a batch of your company's products.
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Calculate the overhead for a batch of products by multiplying the given overhead allocation rate by the number of machine-hours used. In the example, if your overhead allocation rate is $15 per machine-hour, multiply $15 by 100 machine-hours, resulting in $1,500 in overhead that must be allocated for that batch of products.
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Add overhead cost to direct costs to determine the total cost to manufacture the batch of products. In the example, if you have $3,000 in direct costs, add $1,500 in overhead, resulting in a total manufacturing cost of $4,500 for the batch of products.
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