Answer first
What this calculator tells you
Calculate the overhead rate on labor cost and the overhead per labor hour. Add a fair share of overhead to a job's labor cost before you price it. Formula: Overhead rate = total overhead ÷ direct labor cost × 100; per hour = total overhead ÷ direct labor hours. At the worked-example inputs, the overhead rate on labor cost is 60.0%. Holding every other input steady, moving total overhead from $96,000 to $144,000 moves the result from 48.0% to 72.0%.
Transparent method
The formula
Add a fair share of overhead to a job's labor cost before you price it.
Worked example
Example inputs
How to interpret the result
Overhead is the cost of running the business that no single job pays for directly, and an overhead rate spreads it across the work. With $120,000 of overhead and $200,000 of direct labor, the rate is 60 percent of labor cost, or $15 for each of 8,000 labor hours. A job that costs $1,000 in labor then carries $600 of overhead, and a quote that ignores it loses money on every job.
At the worked-example inputs the overhead rate on labor cost is 60.0%. It rises with total overhead and falls as direct labor cost increases; direct labor hours does not move it.
These are planning metrics, not audited accounting or a valuation opinion.
Before you rely on it
What to check
Pick the base that fits the business. Labor cost suits a labor-heavy trade, and machine hours suit a shop where equipment drives the cost.
The common error
Where people go wrong with overhead rate calculator
Using last year's rate without checking it. If overhead grows faster than labor, the old rate leaves each job under-charged.
Sensitivity evidence
How total overhead changes the overhead rate on labor cost
Holding every other input at the worked-example value, moving total overhead from $96,000 to $144,000 moves the overhead rate on labor cost from 48.0% to 72.0%: a spread of 24.0%, or 40% of the worked-example result.
| Total overhead | Overhead rate on labor cost | Overhead per labor hour |
|---|---|---|
| $96,000 | 48.0% | $12 |
| $108,000 | 54.0% | $14 |
| $120,000worked example | 60.0% | $15 |
| $132,000 | 66.0% | $17 |
| $144,000 | 72.0% | $18 |
Every input, tested
Which input moves the overhead rate on labor cost most
Of the 3 inputs, total overhead moves the overhead rate on labor cost most (12.0% across the range tested) and direct labor cost moves it least (12.1%). Direct labor hours does not change it at all.
| Input | Tested from | To | Overhead rate on labor cost at each end | Swing |
|---|---|---|---|---|
| Total overhead | $108,000 | $132,000 | 54.0% to 66.0% | 12.0% (20%) |
| Direct labor cost | $180,000 | $220,000 | 66.7% to 54.5% | 12.1% (20%) |
| Direct labor hours | 7,200 | 8,800 | 60.0% to 60.0% | none |
Two variables at once
Overhead rate on labor cost by total overhead and direct labor cost
Across the grid the overhead rate on labor cost runs from 40.0% to 90.0%. Moving total overhead from $96,000 to $144,000 shifts it by 24.0% at the middle column, and moving direct labor cost from $160,000 to $240,000 shifts it by 25.0% at the middle row, so direct labor cost is the bigger lever here.
| Total overhead \ Direct labor cost | $160,000 | $200,000 | $240,000 |
|---|---|---|---|
| $96,000 | 60.0% | 48.0% | 40.0% |
| $108,000 | 67.5% | 54.0% | 45.0% |
| $120,000 | 75.0% | 60.0% | 50.0% |
| $132,000 | 82.5% | 66.0% | 55.0% |
| $144,000 | 90.0% | 72.0% | 60.0% |
The highlighted cell is the worked example: 60.0%.
Step by step
The worked example, input by input
| Input | Value used | What it means |
|---|---|---|
| Total overhead | $120,000 | Enter the total overhead used in this calculation. |
| Direct labor cost | $200,000 | Enter the direct labor cost used in this calculation. |
| Direct labor hours | 8,000 | Enter the direct labor hours used in this calculation. |
| Overhead rate on labor cost | 60.0% | |
| Overhead per labor hour | $15 | |
Inputs, definitions and assumptions
Total overhead
Enter the total overhead used in this calculation. The prefilled worked-example value is $120,000.
Direct labor cost
Enter the direct labor cost used in this calculation. The prefilled worked-example value is $200,000.
Direct labor hours
Enter the direct labor hours used in this calculation. The prefilled worked-example value is 8,000.
How to use this calculator
- 1Verify the inputs. Gather total overhead, direct labor cost and direct labor hours from your own documents; the prefilled values are examples.
- 2Save a baseline. The worked example puts the overhead rate on labor cost at 60.0%. Store your own version of it as Scenario A.
- 3Test one change. Start with total overhead, the input with the biggest effect here: moving total overhead from $108,000 to $132,000 takes the overhead rate on labor cost from 54.0% to 66.0%, a swing of 20% of the worked-example figure.
- 4Check the extremes. At half the example total overhead ($60,000) the overhead rate on labor cost is 30.0%; at double ($240,000) it is 120.0%.
People also ask
Frequently asked questions
How do you calculate overhead rate?
Overhead rate = total overhead ÷ direct labor cost × 100; per hour = total overhead ÷ direct labor hours. Enter total overhead in dollars and direct labor cost in dollars. At the worked-example inputs the overhead rate on labor cost is 60.0%.
What does the overhead rate result mean?
Add a fair share of overhead to a job's labor cost before you price it. At the worked-example inputs the overhead rate on labor cost is 60.0%. It rises with total overhead and falls as direct labor cost increases; direct labor hours does not move it.
How much does total overhead change the overhead rate on labor cost?
Holding every other input at the worked-example value, moving total overhead from $96,000 to $144,000 moves the overhead rate on labor cost from 48.0% to 72.0%, a spread of 24.0%.
What are the limits of this overhead rate calculator?
These are planning metrics, not audited accounting or a valuation opinion. The tables on this page test total overhead only from $96,000 to $144,000; a value outside that range is not tabulated here.
Which input moves the overhead rate on labor cost most in the overhead rate calculator?
Ranked by how far each moves the overhead rate on labor cost across the range tested: total overhead (12.0%, 20%) and direct labor cost (12.1%, 20%). Direct labor hours does not change it.
If I double total overhead in the overhead rate calculator, does the overhead rate on labor cost double?
Doubling it from $120,000 to $240,000 takes the overhead rate on labor cost from 60.0% to 120.0%, which is 2.00 times the worked-example figure. So the result scales almost exactly in proportion. Halving it to $60,000 gives 30.0%.
How much does direct labor cost matter in the overhead rate calculator?
The worked example uses $200,000. Holding every other input at its worked-example value, moving direct labor cost from $180,000 to $220,000 takes the overhead rate on labor cost from 66.7% to 54.5%, a swing of 20% of the worked-example figure.
How much does direct labor hours matter in the overhead rate calculator?
The worked example uses 8,000. The overhead rate on labor cost does not depend on direct labor hours; it moves the overhead per labor hour from $17 to $14 instead when direct labor hours goes from 7,200 to 8,800.
Which inputs change the overhead per labor hour in the overhead rate calculator?
At the worked-example inputs it is $15. Total overhead takes it from $14 to $17 and direct labor hours takes it from $17 to $14.
When should a business raise outside capital?
When the capital produces more value than the ownership or interest it costs, and when the business can survive the raise taking longer than planned. Raising to fund a proven, repeatable use of money is very different from raising to postpone a decision about whether the model works.
Sources and evidence
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