How is the overhead rate calculated?

The overhead rate is calculated by dividing total indirect costs (overhead) by the allocation base — such as direct labor hours, machine hours, or direct labor cost. For example, if total overhead is $50,000 and you use 10,000 direct labor hours, the overhead rate is $5 per labor hour. Multiply this rate by actual hours used to get applied overhead.

What is the difference between overhead rate and burden rate?

Overhead rate and burden rate refer to the same concept — the cost added on top of direct costs to cover indirect expenses. The term 'burden rate' is common in manufacturing and labor costing, while 'overhead rate' is used more broadly. Both measure how much indirect cost is assigned per unit of the allocation base.

What is a predetermined overhead rate?

A predetermined overhead rate is set at the start of a period using estimated overhead and estimated activity levels. It allows businesses to apply overhead to jobs or products throughout the year without waiting for actual costs. At year-end, the difference between applied and actual overhead is the over- or under-applied overhead variance.

What are examples of overhead costs?

Overhead costs are indirect expenses not tied to a specific product or job. Common examples include rent, utilities, insurance, equipment depreciation, administrative salaries, repairs, supplies, and property taxes. In manufacturing, these are called factory overhead. In service businesses, they include office costs, software subscriptions, and management salaries.

What allocation base should I use for overhead?

The best allocation base is one that has a strong relationship with your overhead costs. Direct labor hours work well in labor-intensive businesses. Machine hours suit automated factories. Direct labor cost is simple to apply. Revenue is useful for service firms. Activity-based costing uses multiple cost drivers for more accuracy. Choose the base that best reflects how your indirect costs are consumed.

Overhead Rate Calculator

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Enter Your Cost Data

Total Overhead Costs

All indirect costs for the period

Currency Symbol

Allocation Base Type

Total Allocation Base (hours)

Total for the same period as overhead

Actual Base Used (this job/unit)

To calculate applied overhead

Direct Costs (for this job/unit)

Direct labor + direct materials combined

Actual Overhead Incurred

Shows over/under-applied variance

Desired Profit Margin (%)

Optional — shows suggested price

Total Units Produced / Jobs

For overhead cost per unit

Period

Your Overhead Breakdown

Fill in your cost data on the left and click Calculate to see your overhead rate and full cost breakdown.

Overhead Burden Rate

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per direct labor hour

Cost Breakdown

Total Overhead —

Allocation Base Total —

Overhead Rate —

Applied Overhead (this job) —

Total Job Cost —

Overhead per Unit —

Over/Under-Applied —

Suggested Selling Price —

Cost Composition

Cost Components Comparison

How Overhead Rate Works

The overhead rate — also called the burden rate — tells you how much indirect cost to attach to each unit of your allocation base. Indirect costs are expenses that keep your business running but cannot be traced directly to a single product or job. Examples include rent, utilities, insurance, depreciation, and management salaries.

By spreading those costs across your allocation base (such as direct labor hours or machine hours), you make sure every product or project carries a fair share of overhead. Without this, you could easily underprice jobs or miss the true cost of running your operation.

The overhead rate is used in job costing, process costing, and service billing. Freelancers, contractors, and small business owners also use it to set rates that cover all costs, not just the obvious ones.

Overhead Rate Formula

The core formula has just two parts:

Overhead Rate = Total Overhead ÷ Allocation Base
Applied Overhead = Overhead Rate × Actual Base Used
Total Job Cost = Direct Costs + Applied Overhead
Overhead % = (Applied Overhead ÷ Total Job Cost) × 100

Example: Overhead = $50,000. Direct labor hours = 10,000. Rate = $5/hr. A job uses 200 hrs, so applied overhead = $1,000. If direct costs are $4,000, total job cost = $5,000.

Common Allocation Bases

Allocation Base	Best For	How to Measure
Direct Labor Hours	Labor-intensive businesses	Time cards / payroll records
Direct Labor Cost	Variable wage environments	Payroll detail
Machine Hours	Automated factories	Machine logs / sensors
Units Produced	Mass production	Production count
Revenue	Service businesses	Sales reports
Direct Cost	Simple job costing	Job cost sheets
Square Footage	Facility-based allocation	Floor plan records

Typical Overhead Rates by Industry

Overhead rates vary widely by industry. These are general ranges — your actual rate depends on your cost structure:

Industry	Typical OH Rate	Common Base
Manufacturing	50–150% of DLC	Direct labor cost
Construction	15–25% of job cost	Direct cost
Consulting / IT	100–200% of labor	Labor hours
Healthcare	20–40% of revenue	Revenue
Retail	18–35% of revenue	Revenue
Restaurant	30–50% of revenue	Revenue
Freelancer	40–100% of labor	Billable hours

Frequently Asked Questions

Divide your total overhead costs by your allocation base total. If your overhead is $60,000 for the year and you plan to work 12,000 direct labor hours, the rate is $5 per hour. Then multiply that rate by the hours actually used on each job to get applied overhead. Add it to your direct costs for the total job cost.

Over-applied overhead means you applied more overhead to jobs than you actually spent. Under-applied means you charged less than what you spent. This happens because the predetermined rate uses estimates. At year-end, you adjust cost of goods sold to remove the difference. A small variance is normal; a large one signals your estimates need updating.

Yes — overhead and indirect costs are the same thing. They are expenses that support operations but cannot be linked to one specific product or job. Rent, utilities, office supplies, administrative salaries, and insurance are all indirect costs. They are the opposite of direct costs like direct labor and direct materials, which you can trace straight to a product.

You can lower your overhead rate by reducing indirect costs or increasing your allocation base. On the cost side, look for ways to cut rent, utilities, and administrative expenses. On the volume side, producing or billing more units spreads the same fixed overhead over a larger base. Outsourcing non-core tasks and automating processes can also reduce indirect headcount costs over time.

For simple businesses with one product or service type, a single plantwide or firmwide rate is fine and easy to apply. For businesses with multiple departments, production lines, or service types that use resources differently, departmental rates or activity-based costing (ABC) give more accurate job costs. ABC assigns overhead by specific cost drivers and is especially useful when products vary a lot in how they consume indirect resources.

Overhead rate measures how much indirect cost to assign per unit of the allocation base — it is a cost tool. Markup is a pricing tool: you add a percentage on top of total cost (direct + overhead) to determine your selling price. You need the overhead rate first to know your true total cost, and then you apply your desired markup to that total to set a price that covers all expenses and generates profit.

Overhead Rate by Total Overhead & Labor Hours

Rate per direct labor hour at different overhead totals and annual hours. Currency shown as $.

Total Overhead	5,000 hrs	10,000 hrs	15,000 hrs	20,000 hrs	25,000 hrs	40,000 hrs

Formula: Overhead Rate = Total Overhead ÷ Direct Labor Hours. Currency symbol: $.

Overhead as a Percentage of Total Job Cost

How much overhead contributes to the total cost at different direct cost and overhead rate combinations.

OH Rate / hr	50 hrs used	100 hrs used	200 hrs used	500 hrs used	OH % (100 hrs, $20/hr direct)

Applied OH = Rate × Hours Used. OH % = Applied OH ÷ (Applied OH + Direct Costs) × 100. Direct labor assumed at $20/hr.

Applied Overhead by Rate and Hours Used

Quick lookup for applied overhead when you know the rate and hours consumed per job.

Hours Used	$3/hr	$5/hr	$8/hr	$10/hr	$15/hr	$20/hr	$25/hr

Applied OH = Overhead Rate × Hours Used on the Job.

Overhead Cost Per Unit at Different Production Volumes

How overhead cost per unit falls as production volume increases — the fixed cost dilution effect.

Units Produced	OH = $10,000	OH = $25,000	OH = $50,000	OH = $100,000	OH = $250,000

OH per Unit = Total Overhead ÷ Units Produced. Higher volume means lower overhead cost per unit.

Overhead Rate Benchmarks by Industry

General overhead rate ranges used across different industries — for reference and comparison only.

Industry	OH Rate Range	Common Base	Key OH Drivers	Notes
🏭 Light Manufacturing	50–100% of DLC	Direct labor cost	Rent, utilities, equipment	Rate falls with higher volume
🏗️ Construction	15–25% of job cost	Total direct cost	Equipment, supervision	Varies by project type
💻 IT / Software	100–200% of labor	Labor hours	Office, software licenses, HR	High for in-office teams
🏥 Healthcare Clinic	20–40% of revenue	Revenue	Admin staff, insurance, space	Excludes physician pay
🍽️ Restaurant	30–50% of revenue	Revenue	Rent, utilities, management	Excludes food & hourly staff
🛒 Retail Store	18–35% of revenue	Revenue	Rent, marketing, admin	Excludes COGS
🎨 Creative / Agency	80–150% of labor	Billable hours	Studio, software, management	Target 60%+ utilization
🔧 Auto Repair	60–120% of labor	Labor hours	Shop space, tools, admin	Billable hour rate must cover
🏠 Freelancer	40–100% of labor	Billable hours	Home office, software, taxes	Often underestimated

Ranges are general guidelines only. Your actual rate depends on your specific cost structure. Always calculate your own rate from actual numbers.

Suggested Selling Price at Different Margins

Total job cost including overhead vs. selling price needed to hit target profit margin.

Total Cost	10% Margin	15% Margin	20% Margin	25% Margin	30% Margin	40% Margin

Selling Price = Total Cost ÷ (1 − Margin). A 20% margin means 20% of the selling price is profit, not 20% added on top of cost.