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. ## Instructions

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:

## Budget

### 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
```

### 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
```