Should I allocate overhead on labor hours or machine hours?

Use the hours that drive your overhead. Labor-heavy shops traditionally use direct labor hours; automated shops use machine hours, because depreciation, power and maintenance follow machine time. Keep available hours and job hours on the same base.

Should I use last year's actual overhead or next year's budget?

Use next year's budget. A predetermined rate is set before the year from estimated overhead and hours, so quotes need not wait for actuals. Compare it with actuals when utilization moves.

What is under-absorbed overhead?

It is overhead spent that jobs did not carry. It builds when billed hours fall short of budget or your rate is below what overhead needs. Books that apply your rate show it as underapplied overhead.

Does material carry overhead in this calculation?

No. Some shops add a separate material burden for purchasing and receiving. If you do, take those costs out of the overhead pool here so they are not charged twice.

Contract Manufacturing, Job Shop Quoting & Make-to-Order calculator

Overhead Allocation Calculator

Allocate overhead to a job at the burden rate your overhead and billed hours require, and check the burden rate on your quoting sheet. You need annual overhead, available hours, billable utilization and the job's hours.

What this calculator does

Overhead a job must carry at the burden rate your billed hours support, and whether your quoted burden recovers it.

Formula used

Billable hours = available hours × billable utilization
Overhead burden rate = annual overhead ÷ billable hours
Overhead allocated to the job = burden rate × hours on this job
Recovery on this job = (burden rate in your quotes − overhead burden rate) × hours on this job
Annual absorption = quoted burden rate × billable hours − annual overhead; utilization that absorbs it = annual overhead ÷ (quoted burden rate × available hours)

Inputs explained

Annual Overhead: Indirect cost for the year: supervision, rent, utilities, insurance, depreciation.
Available Hours per Year: Direct labor or machine hours available per year, before utilization losses.
Billable Utilization: Hours charged to jobs ÷ available hours, from job tickets.
Hours on This Job: Setup plus run hours from the routing, on the same base.
Burden Rate in Your Quotes: Overhead per hour your quoting sheet adds on top of direct cost.

How to use the result

Best suited to setting next year's burden rate, rechecking an old burden rate after utilization changes.
One plant-wide rate undercosts jobs that use costly machines or floor space more than the average job. Budgeted overhead and utilization are estimates; compare them with actual absorption at year end.

Current U.S. benchmarks

As of Aug 2026, U.S. manufacturing runs at 75.7% of capacity (Federal Reserve via FRED), down 0.1 points from a year earlier. Enter your own plant's utilization; the national figure is a reference point for how loaded the industry is.
The U.S. prime lending rate is 7.00% (Federal Reserve via FRED, 2026-10-02). Payback and financing math should start from today's rate, not a remembered one.

Common questions

Should I allocate overhead on labor hours or machine hours? Use the hours that drive your overhead. Labor-heavy shops traditionally use direct labor hours; automated shops use machine hours, because depreciation, power and maintenance follow machine time. Keep available hours and job hours on the same base.
Should I use last year's actual overhead or next year's budget? Use next year's budget. A predetermined rate is set before the year from estimated overhead and hours, so quotes need not wait for actuals. Compare it with actuals when utilization moves.
What is under-absorbed overhead? It is overhead spent that jobs did not carry. It builds when billed hours fall short of budget or your rate is below what overhead needs. Books that apply your rate show it as underapplied overhead.
Does material carry overhead in this calculation? No. Some shops add a separate material burden for purchasing and receiving. If you do, take those costs out of the overhead pool here so they are not charged twice.

Last reviewed 2026-10-01.