Manufacturing Overhead Rate Calculator

How the calculation works

Overhead — rent, utilities, equipment depreciation, supervision and other indirect production costs — can't be traced to a single product, so it is spread across production using an allocation base. The calculator uses three formulas:

• Predetermined overhead rate = estimated overhead ÷ estimated allocation base
• Applied overhead = predetermined rate × actual allocation base used
• Overhead variance = actual overhead − applied overhead

Worked example

A furniture manufacturer budgets $500,000 of overhead and 25,000 direct labor hours. Its overhead rate is $500,000 ÷ 25,000 = $20 per direct labor hour. A dining table that takes 5 direct labor hours is charged 5 × $20 = $100 of overhead.

If the plant then works 24,000 hours and incurs $500,000 of overhead, it applied 24,000 × $20 = $480,000. That leaves overhead under-applied by $20,000: products were charged slightly less than the overhead actually cost.

Under-applied vs. over-applied overhead

Because the rate is set from estimates, applied overhead rarely equals actual overhead. Under-applied means actual overhead exceeded what was charged to products; over-applied means products absorbed more than was incurred. Small variances are normal. Large or persistent ones are a sign the estimates, or the choice of allocation base, need another look.

Choosing an allocation base

Use the base that best explains why overhead is incurred. Direct labor hours suit labor-intensive production, machine hours suit capital-intensive production, and units produced work when products are uniform. Direct labor cost expresses the rate as a percentage of labor dollars. For a deeper walk-through, including how to identify the overhead costs that go into the estimate, read Manufacturing Overhead Costs: How to Calculate & Reduce Them.

Overhead estimates are only as good as the production data behind them. To learn how ASC Software tracks production, see ASC's Manufacturing Execution System (MES).