Overhead Absorption Rate Calculator (Predetermined Rate and Variances)
Hourly overhead rate set from the budget, overhead charged to production at the actual hours, and the under- or over-absorption split into spending and volume variances.
Results
What this tool does
A factory cannot wait for the year-end bills to cost each job, so it sets a predetermined rate: budgeted overhead divided by budgeted activity, usually labour or machine hours. Jobs are charged that rate for the hours they use. At the end of the period the overhead actually spent is compared with what was charged: if less was charged, overhead is under-absorbed and profit was overstated until the adjustment. The gap splits neatly into a spending variance (spent more or less than budgeted) and a volume variance (worked fewer or more hours than budgeted, leaving fixed cost spread over fewer or more hours).
Formula
rate = budgeted overhead ÷ budgeted hours · under-absorbed = actual overhead − rate × actual hours
Variables
| Symbol | Meaning | Unit |
|---|---|---|
bo | Budgeted overhead for the period | — |
bb | Budgeted activity (labour or machine hours) | h |
ab | Actual activity (same hours) | h |
ao | Actual overhead incurred | — |
OR | Predetermined overhead rate per hour | — |
AB | Overhead charged to production (absorbed) | — |
UN | Under-absorbed (+) or over-absorbed (−) overhead | — |
SV | Spending variance: actual − budget (+ = overspent) | — |
VV | Volume variance: unused activity × rate (+ = under-used) | — |
Worked example
- Budgeted overhead for the period240,000
- Budgeted activity (labour or machine hours)12,000 h
- Actual activity (same hours)11,000 h
- Actual overhead incurred235,000
- Predetermined overhead rate per hour20.0000
- Overhead charged to production (absorbed)220,000.00
- Under-absorbed (+) or over-absorbed (−) overhead15,000.00
- Spending variance: actual − budget (+ = overspent)-5000.00
- Volume variance: unused activity × rate (+ = under-used)20,000.00
Limitations
- The tool works with whatever currency you use for the inputs; it does not convert between currencies.
- The default values are typical reference figures, not measurements of your situation. Replace them with your own data whenever you have it.