Financial Glossary
Budgeted Overhead Rate
The budgeted overhead rate, sometimes called the predetermined overhead rate, is used to allocate indirect costs to products, services, or jobs. In a simple costing system it is calculated by dividing total estimated overhead for the period by an estimated quantity of an allocation base, such as labor hours or machine hours. Because it is set before the period begins using forecasts, actual results are later compared against it to identify over- or under-applied overhead.
Problem & Application
Service and hospitality operators with significant indirect costs, like utilities, insurance, and administrative wages, need a way to attach those costs to jobs or units so pricing covers them. A budgeted overhead rate lets a catering business or a maintenance-heavy property operation quote work that includes a fair share of overhead instead of pricing on direct costs alone. Comparing applied overhead to actuals at period end then shows whether estimates were realistic.
In Short
A budgeted overhead rate spreads indirect costs onto jobs and products so pricing and profitability reflect the full cost of doing the work.