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.
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.
- Overhead recovery rate is the amount of overhead recovered in relation to the direct costs of production.
- A fixed cost is one that does not change based on changes in output of the product or service.
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.
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.