How do I calculate overhead for my workcenters?

 

Overview

Overhead represents indirect costs (utilities, supervision, depreciation, etc.) allocated to production. This guide shows common methods, how to compute rates, and how to configure them on workcenters for consistent cost rollups.

Choose a method

• Rate per hour (most common): /machine−houror/machine-hour or /machine−houror/labor-hour
• Percent of labor: Overhead% applied to direct labor cost
• Fixed rate per setup/run: Flat persetup,orper setup, orpersetup,or per run hour
• Periodic fixed overhead allocation: Total monthly overhead divided by expected productive hours

Collect inputs

• Indirect costs per period (rent, utilities, maintenance, indirect labor, depreciation)
• Expected productive hours (capacity × utilization × efficiency)
• Direct labor rate(s) if using a percent-of-labor method

Compute the rate (examples)

• Per-hour method:
  • Monthly indirect cost = $12,000
  • Expected productive machine hours/month = 600
  • Overhead rate = $12,000 / 600 = $20.00 per machine-hour
• Percent-of-labor method:
  • Direct labor cost on an operation = $100.00
  • Overhead% = 65%
  • Overhead applied = $100 × 0.65 = $65.00

Configure in the system (typical fields)

• Open: Production > Resources > Workcenter Maintenance
• Select the workcenter
• Enter one of:
  • Overhead Rate ($/hr) for run and/or setup
  • Overhead % of Labor (enter percent)
  • Fixed Overhead per Setup/Run (if supported)
• Confirm calendar, efficiency, and utilization are accurate to avoid under/over-absorbing overhead
• Save changes

Validate with a costed routing

• Open or create a routing for a representative item
• Cost the routing (or run a cost roll) and review:
  • Direct Labor
  • Machine
  • Overhead
• Confirm overhead aligns with your expectation based on the configured method

Tips

• Keep the method consistent across similar workcenters to simplify analysis
• Revisit rates quarterly or when costs change materially
• If using standard cost, re-roll item costs after overhead changes

FAQs

• Should I apply overhead on setup time?
  • If setup consumes the same indirect resources, yes. Otherwise, keep overhead only on run hours.
• What if my hours vary a lot?
  • Use a rolling average of productive hours to set rates; revisit frequently.