How to Allocate Overhead Costs?
The overhead rate is a cost associated with the production of a product or service. Overhead expenditures are expenses that are not directly related to production, such as the cost of the corporate office. To distribute overhead expenses, an overhead rate is used to direct production costs by spreading or distributing them according to particular metrics.
For example, overhead expenses may be imposed at a fixed rate depending on the number of machine or human hours necessary for the product.
Let’s assume a company has overhead expenses that total ₹20 lakhs for the period. The company wants to know how much overhead relates to direct labor costs. The company has direct labor expenses totaling ₹5 lakhs for the same period.
Overhead Rate = ₹4, meaning that it costs the company ₹4 in overhead costs for every rupee in direct labor expenses.
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