Overhead Costs

The overhead costs are entered in the form of a percentage increase to be added to above rates. There are three types of overhead costs:

Purchasing Overhead Rates

The purchasing overhead rates are associated to the cost of the purchasing department. From the budget procedure, one calculates the percentage of the cost of the purchasing department in relation to the total purchasing budget. More precisely, this purchasing overhead rate (expressed in percentage) is computed as the ratio between the total cost of running the purchasing department (over the budgetary period) divided by the total cost of the purchases (over the budgetary period). The percentage increase is entered and will affect the cost of a manufactured product by increasing the materials cost of the product.

It is worth noting that the overhead rates on purchases also apply to the subcontracting costs.

Plant Overhead Rates

The plant overhead rates correspond to the costs induced by departments (directly/indirectly) taking part in the activity of the whole factory (production engineering, warehouses, shop management, etc.). Expressed in percentage, the plant overhead rates are computed as the ratio between the total cost of the supporting departments (over the budgetary period) divided by the total number of labor hours or machine hours in the factory.

These costs are allocated to the products in increasing by a certain percentage the labor and/or the machine costs.

Company Overhead Rates

Similarly, the company overhead rates correspond to the costs of the departments at the company headquarters (design, marketing, management…). Again, these costs can be allocated to the products in increasing by a certain percentage the labor and/or the machine costs.