# How to Calculate Overhead Rate (With Examples)

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To accurately assess profitability and price their products appropriately, businesses look at the overhead rate — the cost added on to the direct costs of production. The overhead rate spreads indirect costs across direct costs based on the allocation measure, which can be a dollar amount for direct costs, total labour hours, or even machine hours.

#### Overhead rate example: Anna’s ice cream factory

Example 1: Overhead rate per employee

Anna has an ice cream factory that had overhead expenses totalling \$900,000 in June. In that same month, she had 400 employees working on the production line.

Overhead rate = Indirect cost / Number of employees = \$900,000 / 400 staff = \$2,250

The factory’s overhead rate per employee is \$2,250. This means that it cost the company \$2,250 in overhead costs for every employee.

Example 2: Overhead rate per hour worked

In July, Anna’s factory had overhead expenses totalling \$900,000 and her staff worked a total of 504,000 hours making ice cream.

Overhead rate = Indirect cost / Hours worked = \$900,000 / 504,000 hours = \$1.79

The factory’s overhead rate per hour is \$1.79. This means that it cost the company \$1.79 in overhead costs for every hour of labour.

Example 3: Overhead rate per direct cost

In August, Anna’s factory had overhead expenses totalling \$1,000,000 and direct costs totalling \$250,000

Overhead rate = Indirect cost / Direct costs = \$1,000,000 / \$250,000 = \$4

The factory’s overhead rate per direct cost is \$4. This means that it cost the company \$4 in overhead costs for every dollar spent on direct expenses.

Anna now knows how to accurately price her ice cream in order to maintain a healthy profit margin that compensates for her indirect costs. 