What is Overhead Rate ?

Definition of Overhead Rate

Definition of Overhead Rate

Overhead Rate is basically the management expenses of a company that need to operate general corporate functions, and which cannot be for sure related to any revenue-generating activities or units of outcome (such as products to be sold).

Brief Explanation of Overhead Rate

It is often difficult to evaluate precisely the amount of expenses that should be related to each manufacturing process. Therefore, expenses must be approximated based on an Overhead Rate for each price driver or action. It is a necessary part of a company, and must be paid for even when sales levels are low or nonexistent. The price of overhead can be significant, which is why supervisors tend to closely monitor it. In managing to account, a price added on to the direct expenses of manufacturing in order to better evaluate the productivity of each item. Overhead Rate is every price that is not proportional to creating the good to be marketed. These include management incomes, the charges of the building or equipment, income to salesmen, and many other items. To spend these expenses, an Overhead Rate is used that propagates the expenses around based on how many resources an item or action used. For example, expenses may provide at a set rate based on the number of machine hours needed for the item. In more complicated cases, a combination of several price motorists may be used to approximate expenses.

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