Dictionary / Overhead Rate
What does Overhead Rate mean in accounting?
Quick definition
Inventory & costingA standard rate at which overhead is allocated. This term guides how bookkeepers record, classify, and explain related transactions in routine financial reporting.
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Examples
A per-hour rate on a stair job
You run a stair mill. In early January you add last year's shop rent, power, and supervisor wages ($96,000) and divide by 4,800 expected shop hours, so the overhead rate is $20 per labor hour. On April 14 you finish a residence newel-and-rail job at 38 shop hours and apply $760 of overhead (38 × $20) onto that job in QuickBooks Online job costing. The overhead pool is the bucket of rent and power; $20 is the rate you used to charge the job. Skip the application and that job looks $760 more profitable than it was.
Last year's rate after the shop doubled
You run a powder-coating shop. Last year you set $14 per machine hour from $42,000 of shop overhead over 3,000 machine hours. In May you lease a second booth from a landlord and add a second oven, so monthly shop overhead is now about $7,800, roughly double. On June 22 you coat a 40-hour run for a railing client and still apply $560 ($14 × 40) in QuickBooks Online job costing. Recalculate the rate against the new booth rent and power; keep last year's $14 and that client looks cheaper than it was while most of the new rent stays in the overhead pool.
Why it matters
You use an overhead rate when shop or factory overhead sits in a pool and you need a standard way to charge jobs or products their share. The rate is the multiplier (dollars per labor hour, per machine hour, or a percent of materials), set or refreshed when you budget the year or when the shop changes size, then applied each time you close a job or at month-end if you run job costing. Mix it up with the overhead pool and you treat the bucket of rent and utilities as if it were the formula. Skip the rate, or leave last year's standard in place after volume or rent jumps, and jobs get the wrong load while the pool sits on the P&L.
Further reading
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What is Overhead Rate in bookkeeping?
A standard rate at which overhead is allocated.
When should I use Overhead Rate?
Use Overhead Rate when the transaction facts match its definition and you need the ledger and financial statements to reflect the correct account and period.
What is a common mistake with Overhead Rate?
Overhead Rate is used for overhead rate entries, while Offset covers a related but distinct bookkeeping purpose. Review both terms before posting unusual transactions. A common mistake is applying it by label only instead of checking the underlying transaction details.