Overhead Rate

An overhead rate is a way businesses allocate indirect costs—such as rent, utilities, and administrative expenses—to their products or services. Since these costs aren’t tied to a specific product, the overhead rate helps determine how much of these expenses should be assigned to each item based on a chosen activity measure (like labor hours or machine time). This allows companies to accurately calculate product costs, set appropriate prices, and analyze profitability. Essentially, the overhead rate ensures all indirect costs are fairly distributed, providing a clearer picture of the true cost of production.