In order to make decisions about pricing, profitability and inventory valuations, a business needs to absorb some of its overhead into the cost of its products. This overhead recovery rate calculator can be used to calculate the amount of overhead to be absorbed by a product, based on a given budgeted overhead and absorption base.
If you need further information on the calculation of overhead absorption, this is more fully discussed in our overhead absorption in cost accounting tutorial.
The Excel overhead recovery rate calculator, available for download below, is used by entering the budgeted overhead and the absorption base and units to be used.
By entering the number of absorption base units used in the manufacture of each product, the calculator then determines the amount of overhead to be absorbed
To use the calculator enter the details as follows:
1. Enter the Budgeted Overhead
Enter the total amount of budgeted overhead which is to be absorbed by the production units.
2. Enter the Absorption Base Units
The absorption base forms the basis on which overhead is absorbed into the cost of the production units. The base is normally a quantity such as direct labor cost, direct labor hours, machine hours or material cost.
If for example, overhead is to be absorbed on the basis of direct labor hours and it is budgeted that 30,000 direct labor hours will be used in an accounting period, then 30,000 is entered as the absorption base units.
The overhead recovery rate calculator works out the absorption rate per base unit, sometimes referred to as the overhead recovery rate. If the budgeted overhead is 75,000 and the absorption base units are 30,000, then the predetermined overhead recovery rate is calculated using the absorption rate formula as follows.
Overhead absorption rate = Overhead / Absorption base units Overhead absorption rate = 75,000 / 30,000 = 2.50 per base unit
Product Overhead Absorption
3. Enter the Product Base Units
For each product enter a description of the product and the number of absorption base units used in the manufacture of the product. For example, if the base used is direct labor hours, and the number of labor hours used in the manufacture of the product is 3.50, then enter 3.50 under the base units column for the product.
Finally, for each product, the overhead recovery rate calculator determines the overhead to be absorbed by one unit of the product.
For example if the predetermined absorption rate is 2.50 per direct labor hour, and it takes 3.50 direct labor hours to manufacture the product, the amount to be absorbed by each unit of the product is calculated as follows.
Overhead absorbed by the product = Overhead absorption rate x Labor hours used Overhead absorbed by the product = 2.50 x 3.50 = 8.75 per unit of product
The total overhead absorbed can be calculated by multiplying this value by the number of units produced. If for example 1,200 units are produced, then the overhead absorbed is determined as follows.
Overhead absorbed = Product absorption rate x Number of product units Overhead absorbed = 8.75 x 1,200 = 10,500
Overhead Recovery Rate Calculator Download
The overhead recovery rate calculator spreadsheet is available for download in Excel format by following the link below.
The overhead recovery rate calculator is one of many financial calculators used in bookkeeping and accounting, discover another at the links below.
- Units of Activity Depreciation Calculator
- Gross Profit Method Calculator
- Debt to Equity Ratio Calculator
Users use this overhead absorption calculator at their own risk. We make no warranty or representation as to its accuracy and we are covered by the terms of our legal disclaimer, which you are deemed to have read. This is an example of a cost recovery calculator that you might use when considering how to determine product overhead absorption. It is purely illustrative. This is not intended to reflect general standards or targets for any particular business, company or sector. If you do spot a mistake in this manufacturing overhead recovery rate calculator, please let us know and we will try to fix it.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.