# How to calculate overhead recovery

Written by carter mcbride
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Overhead recovery rate is the amount of overhead recovered in relation to the direct costs of production. So if the overhead recovery rate is 30 per cent, then for every £1 of direct costs, the company will have an additional 30p incurred in overhead while operating at normal capacity. This formula is useful to determine how much overhead goes into production of a good.

Skill level:
Easy

## Instructions

1. 1

Determine fixed production overhead. This is comprised of items that are an indirect cost to the production of a good, such as manager's wages, which are also fixed in nature. A fixed cost is one that does not change based on changes in output of the product or service. Fixed production overhead must be both fixed and indirect.

2. 2

Determine direct costs. Direct costs are costs tightly associated with the production of a good. A company can trace a direct cost to actual production of a good or service, such as labour used to produce the good or service or the cost of material used in production.

3. 3

Divide fixed production overhead by direct costs, which equals the overhead recovery rate. For example, if there was £100 in fixed production overhead costs and £1,000 of direct costs, then £100/1,000 equals 0.1, or 10 per cent. So for every £1 of direct costs, a company will have 10p of fixed production overhead costs.

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