How do you calculate overhead absorption?

Multiply machine hours by the overhead rate per hour, scale by capacity utilization, then add the fixed overhead floor. With 4,000 hours at $65/hr, 95% utilization and a $10,000 floor, total absorbed overhead is $257,000.

What is overhead absorption cost per hour?

It is total absorbed overhead divided by machine hours. In the worked example, $257,000 over 4,000 hours gives $64.25 per machine hour.

What is over- and under-absorption?

Over-absorption means actual overhead came in below what you charged to jobs (a credit variance); under-absorption means actual overhead exceeded what was recovered. Both flow to the income statement as a period adjustment.

What is a good capacity utilization to absorb on?

Many plants absorb at practical capacity (roughly 80-95%) rather than theoretical 100%, so idle-capacity cost is expensed rather than buried in product. The 95% used here is typical of a well-loaded cell.

Machine-hour rate vs labor-hour rate?

Use a machine-hour rate when cost is driven by equipment time (CNC, injection molding); use a labor-hour rate when manual content dominates. Picking the wrong base misallocates burden between products.

Why include a fixed overhead floor?

Some indirect costs — minimum facility charges, fixed leases — exist regardless of hours run. The floor ($10,000 here) ensures they are recovered even at low volume, adding $64.25 nowhere yet $10,000 to the total.

Manufacturing Cost Accounting & Finance calculator

Overhead Absorption Calculator

Overhead absorption is how a plant attaches its indirect costs — supervision, depreciation, utilities, maintenance — to the products that flow through a machine or work center. Cost accountants and controllers use it to convert a budgeted overhead pool into a per-hour rate that standard costing and job quotes can carry. It matters because under-absorbed overhead silently erodes margin, while over-absorbed overhead inflates inventory value and distorts product profitability. On the shop floor, this number is the bridge between what the plant spends to stay open and what each job is actually charged.

What this calculator does

Estimates the overhead absorbed into production from machine hours, a predetermined rate, and capacity utilization.
A plant controller checking how much factory overhead a work center absorbs at a given activity level.
It computes the total overhead absorbed into production from machine hours and a per-hour rate, scaled by utilization, plus a fixed overhead floor.

Formula used

Absorbed overhead = machine hours x rate per hour x utilization% + fixed floor
Absorbed overhead per hour = total absorbed overhead / machine hours

Inputs explained

Machine Hours Run:
Overhead Rate per Hour:
Capacity Utilization:
Fixed Overhead Floor:

How to use the result

Use it when setting standard burden rates, validating an absorption base, or checking whether budgeted hours will fully recover the plant's indirect spend.
It assumes a single machine-hour driver; plants with mixed labor-intensive and capital-intensive cells often need activity-based pools to avoid cross-subsidizing products.

Current U.S. benchmarks

As of May 2026, U.S. manufacturing runs at 75.6% of capacity (Federal Reserve via FRED), up 0.2 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 6.75% (Federal Reserve via FRED, 2026-07-02). Payback and financing math should start from today's rate, not a remembered one.

Common questions

How do you calculate overhead absorption? Multiply machine hours by the overhead rate per hour, scale by capacity utilization, then add the fixed overhead floor. With 4,000 hours at $65/hr, 95% utilization and a $10,000 floor, total absorbed overhead is $257,000.
What is overhead absorption cost per hour? It is total absorbed overhead divided by machine hours. In the worked example, $257,000 over 4,000 hours gives $64.25 per machine hour.
What is over- and under-absorption? Over-absorption means actual overhead came in below what you charged to jobs (a credit variance); under-absorption means actual overhead exceeded what was recovered. Both flow to the income statement as a period adjustment.
What is a good capacity utilization to absorb on? Many plants absorb at practical capacity (roughly 80-95%) rather than theoretical 100%, so idle-capacity cost is expensed rather than buried in product. The 95% used here is typical of a well-loaded cell.
Machine-hour rate vs labor-hour rate? Use a machine-hour rate when cost is driven by equipment time (CNC, injection molding); use a labor-hour rate when manual content dominates. Picking the wrong base misallocates burden between products.

Last reviewed 2026-05-12.