Overhead Rate
Overhead rate is the ratio used in manufacturing and supply-chain accounting to assign indirect costs—such as utilities, supervision, and depreciation—to products, jobs, or activities. It is calculated as total indirect or overhead costs divided by an allocation base like direct labor hours, machine hours, direct labor dollars, or revenue. In production costing, a predetermined overhead rate applies estimated overhead to units during the period.
On the shop floor, overhead rate turns shared operational costs into a per-unit or per-operation standard cost. A work center might be assigned an overhead rate per machine hour; each routing operation multiplies that rate by reported hours to absorb indirect costs into WIP and finished goods. ERP systems maintain these rates by cost scenario and organization, consuming them during cost rollup, standard costing, or work order completion. If the allocation base is machine hours, an automated cell with high utilization absorbs more overhead per batch than a labor-intensive line, even when direct labor is low. Predetermined rates stabilize costing during the period, but actual overhead often differs, producing underapplied or overapplied overhead that is reconciled during financial close. This flow directly impacts standard cost, inventory valuation, work-order pricing, and variance analysis.
What is the difference between plant overhead and work center overhead?
Plant overhead is assigned at the broader facility or item-category level, while work center overhead is tied to a specific work center and resource type, allowing granular absorption by operation.
What is an absorption type in overhead costing?
An absorption type determines how overhead is applied, such as by percentage rate or fixed value. In Oracle SCM, the setup allows either rate-based or fixed overhead absorption depending on the cost model.
Why use a predetermined overhead rate instead of actual overhead?
A predetermined rate lets manufacturers apply overhead during the period for pricing, WIP valuation, and job costing without waiting for month-end actuals. It is the standard approach in job costing and absorption costing.