Overhead Rate Calculator
Calculate business overhead rate from indirect costs versus direct labor or revenue.
Returns overhead percentage and per-employee cost for accurate pricing.
The overhead rate tells you how much indirect cost is attached to every unit of direct activity — usually per labor hour, per machine hour, or per dollar of direct labor. It is one of the most important numbers in cost accounting because it lets you price jobs, products, and services accurately instead of guessing.
Formula: Overhead Rate = Total Overhead Costs ÷ Total Direct Labor Hours (or another allocation base)
What each variable means:
- Total Overhead Costs — all indirect costs that cannot be traced to a single job: rent, utilities, insurance, depreciation, supervisor salaries, office supplies.
- Allocation Base — the activity measure you divide by. Common choices are direct labor hours, machine hours, or direct labor dollars.
Worked example: A small cabinet shop has $48,000 in annual overhead and expects to work 2,400 direct labor hours this year.
Overhead Rate = $48,000 ÷ 2,400 hours = $20.00 per labor hour
Every hour a carpenter spends on a customer job adds $20 to that job’s cost, on top of their wage.
Typical ranges:
- Light manufacturing: $15–$40 per labor hour
- Heavy manufacturing: $40–$120 per labor hour
- Service businesses: 20–80% of direct labor cost
If your overhead rate is climbing year over year, investigate fixed costs like rent or insurance — those are the most common culprits. A lower overhead rate compared to competitors is a genuine pricing advantage.