# What is my overhead rate?

Computes the overhead rate (predetermined overhead rate): overhead costs divided by an allocation base such as direct labor cost, labor hours or machine hours, and the overhead applied to a job.

- Page: https://www.acalculator.org/finance/overhead-rate-calculator
- JSON spec: https://www.acalculator.org/finance/overhead-rate-calculator.json
- Version: 70e28abec612

## Default answer

Example with the default inputs (Overhead costs $250,000.00, Allocation base Direct labor cost, Allocation base for the period 100,000): Overhead of $250,000.00 over an allocation base of 100,000 (Direct labor cost) gives an overhead rate of $2.50.

## Inputs

| Key | Label | Description |
| --- | --- | --- |
| overhead | Overhead costs | Indirect costs for the period: indirect labor and materials, utilities, rent, insurance, depreciation. |
| basis | Allocation base | What the overhead is spread over: a cost in dollars, hours, or units made. |
| base | Allocation base for the period | The expected (or actual) amount of the base for the same period: dollars, hours or units. |
| job | Base used by one job | Optional: the dollars, hours or units of the base one job or product used, to apply overhead to it. |

## Outputs

| Key | Label | Description |
| --- | --- | --- |
| rate | Overhead rate ($ per unit of the base) | Overhead ÷ allocation base: dollars of overhead for each dollar, hour or unit of the base. |
| percent | Overhead rate as a percent | Overhead ÷ allocation base × 100, for a base in dollars (direct labor cost or sales). |
| applied | Overhead applied to the job | Overhead rate × the base the job used. |

## Method

Overhead rate = overhead costs ÷ allocation base; as a percent for a dollar base, × 100; overhead applied to a job = overhead rate × the base the job used.

## Assumptions

- The overhead and the allocation base are for the same period, usually estimates for the year ahead (a predetermined rate).
- The base is one activity that drives overhead, such as direct labor cost, direct labor hours, machine hours, units produced or sales.
- Arithmetic is exact on the typed decimals; the rate shows to 2 to 4 decimals, percents to 2 decimals and money to the cent, halves up.

## Worked examples

1. overhead = $250,000.00, basis = labor-cost, base = 100,000, job = 66 gives rate = 2.50, percent = 250%, applied = $165.00. Source: OpenStax, Principles of Managerial Accounting, 4.4 Compute a Predetermined Overhead Rate and Apply Overhead to Production (estimated overhead ÷ expected level of activity = predetermined overhead rate; Dinosaur Vinyl: $250,000 ÷ $100,000 of direct labor = $2.50 per direct labor dollar; job MAC001: $66 of direct labor × $2.50 = $165). https://openstax.org/books/principles-managerial-accounting/pages/4-4-compute-a-predetermined-overhead-rate-and-apply-overhead-to-production: 250,000 ÷ 100,000 = 2.50.
2. overhead = $400,000.00, basis = labor-cost, base = 200,000 gives rate = 2.00, percent = 200%. Source: OpenStax, Principles of Managerial Accounting, 4.2 Describe and Identify the Three Major Components of Product Costs under Job Order Costing (a bakery: $400,000 of estimated overhead ÷ $200,000 of direct labor = $2.00 of overhead per $1.00 of direct labor). https://openstax.org/books/principles-managerial-accounting/pages/4-2-describe-and-identify-the-three-major-components-of-product-costs-under-job-order-costing: 400,000 ÷ 200,000 = 2.00.
3. overhead = $250,000.00, basis = machine-hours, base = 12,500, job = 18 gives rate = 20.00, applied = $360.00. Source: OpenStax, Principles of Managerial Accounting, 4.4 Compute a Predetermined Overhead Rate and Apply Overhead to Production (estimated overhead ÷ expected level of activity = predetermined overhead rate; Dinosaur Vinyl: $250,000 ÷ $100,000 of direct labor = $2.50 per direct labor dollar; job MAC001: $66 of direct labor × $2.50 = $165). https://openstax.org/books/principles-managerial-accounting/pages/4-4-compute-a-predetermined-overhead-rate-and-apply-overhead-to-production (machine hours as the base).
4. overhead = $85,000.00, basis = sales, base = 340,000 gives rate = 0.25, percent = 25%. Source: OpenStax, Principles of Managerial Accounting, 4.4 Compute a Predetermined Overhead Rate and Apply Overhead to Production (estimated overhead ÷ expected level of activity = predetermined overhead rate; Dinosaur Vinyl: $250,000 ÷ $100,000 of direct labor = $2.50 per direct labor dollar; job MAC001: $66 of direct labor × $2.50 = $165). https://openstax.org/books/principles-managerial-accounting/pages/4-4-compute-a-predetermined-overhead-rate-and-apply-overhead-to-production (the rate formula, with sales as the base).
5. overhead = $100,000.00, basis = labor-hours, base = 3,000, job = 7.5 gives rate = 33.3333, applied = $250.00. Source: OpenStax, Principles of Managerial Accounting, 4.4 Compute a Predetermined Overhead Rate and Apply Overhead to Production (estimated overhead ÷ expected level of activity = predetermined overhead rate; Dinosaur Vinyl: $250,000 ÷ $100,000 of direct labor = $2.50 per direct labor dollar; job MAC001: $66 of direct labor × $2.50 = $165). https://openstax.org/books/principles-managerial-accounting/pages/4-4-compute-a-predetermined-overhead-rate-and-apply-overhead-to-production.

## FAQ

### What is an overhead rate?

An overhead rate spreads indirect costs, the costs you cannot trace to one product or job, over a measure of activity called the allocation base. It says how many dollars of overhead go with each dollar of direct labor, each labor or machine hour, or each unit.

### How do I calculate the overhead rate?

Divide the overhead costs by the allocation base for the same period. Dinosaur Vinyl, the OpenStax example, expects $250,000 of overhead and $100,000 of direct labor, so its rate is 250,000 ÷ 100,000 = $2.50 of overhead for each $1 of direct labor (250%).

### How do I apply overhead to a job?

Multiply the overhead rate by the amount of the base the job used. Job MAC001 used $66 of direct labor, so at $2.50 per labor dollar it gets 66 × 2.50 = $165 of overhead, on top of its direct materials and labor.

### Which allocation base should I use?

Pick the activity that drives most of your overhead, so each job gets a fair share. The most common bases are direct labor cost, direct labor hours and machine hours. Units produced or the materials used can also serve as a base.

### What costs count as overhead?

Manufacturing overhead is every production cost other than direct materials and direct labor. Dinosaur Vinyl's estimate lists indirect labor ($5,000), indirect materials ($20,000), utilities ($75,000), depreciation ($90,000), insurance ($35,000) and interest ($25,000): $250,000 in all.

### How do I calculate overhead as a percent of sales?

Choose Sales as the base and enter the sales for the same period. $85,000 of overhead on $340,000 of sales is 85,000 ÷ 340,000 = 0.25, or 25% of sales.

### Why use estimated overhead?

Many overhead costs, such as utilities, arrive through the year, but a job needs a cost when it is done. A predetermined rate from the year’s estimates lets you apply overhead as jobs finish. The gap between applied and actual overhead is settled at year end as underapplied or overapplied overhead.

## Sources

- OpenStax, Principles of Managerial Accounting, 4.4 Compute a Predetermined Overhead Rate and Apply Overhead to Production: estimated (budgeted) overhead cost ÷ expected (budgeted) level of activity = predetermined overhead rate; direct labor hours, direct labor dollars or machine hours are often chosen as the allocation base; Dinosaur Vinyl's $250,000 of estimated overhead (indirect labor $5,000, indirect materials $20,000, utilities $75,000, depreciation $90,000, insurance $35,000, interest $25,000) ÷ $100,000 of direct labor = $2.50 per direct labor dollar; job MAC001: $66 × $2.50 = $165. https://openstax.org/books/principles-managerial-accounting/pages/4-4-compute-a-predetermined-overhead-rate-and-apply-overhead-to-production (retrieved 2026-10-19)
- OpenStax, Principles of Managerial Accounting, 4.2 Describe and Identify the Three Major Components of Product Costs under Job Order Costing: costs that support production but are not direct materials or direct labor are overhead; the most common cost drivers are direct labor in dollars, direct labor in hours and machine hours; estimated annual overhead costs ÷ expected annual activity = overhead allocation rate; a bakery with $400,000 of overhead and $200,000 of direct labor applies $2.00 of overhead for each $1.00 of direct labor. https://openstax.org/books/principles-managerial-accounting/pages/4-2-describe-and-identify-the-three-major-components-of-product-costs-under-job-order-costing (retrieved 2026-10-19)