Calculating the Actual Overhead Rate

For a variety of reasons, such as establishing project fees, your enterprise may want to estimate its actual overhead rate.

Your estimate can be based on overhead rates for existing projects or previous accounting periods. It may differ from the provisional rate, which is the rate last calculated by the Overhead Allocation process.

A common formula is:

Firmwide Overhead Rate = Total Indirect Expenses / Total Year-to-Date Direct Labor or Revenue

• Total Year-to-Date Direct Labor includes balances in accounts 601.00, 602.00 in the standard chart of accounts, and any other user-defined labor posting accounts.
• Total Year-to-Date Revenue includes balances in 400-level accounts in the standard chart of accounts.

Size of Job Cost Variance

The size of the Job Cost Variance account can influence the accuracy of the overhead calculation. If it has a zero balance, or small balance relative to the labor accounts, use the preceding formula to calculate actual overhead. If the balance is significant, there are consequences for overhead calculations.

If you have a significant Job Cost Variance (more than 5% of total labor cost), the direct labor amounts on your reports will not reflect actual payroll labor costs. For this reason, ignoring a large Job Cost Variance produces an incorrect actual overhead rate.

The numerator (Total Indirect Expenses/Total Indirect Expenses) should include the total balance of your 700-level accounts.

If the labor job cost rate includes some indirect expenses, DPS credits the Job Cost Variance account, decreasing the overhead pool. The proration method automatically reflects this; however, you should keep this in mind when choosing the overhead percentage for the assignment method.

Types of Contracts

The calculation of actual overhead can also be affected by contracts that restrict what you can claim as allowable indirect expenses. For example, if you are audited for a government contract, certain overhead items, such as interest expense and some promotional fees, may be disallowed by outside auditors. The auditor can require you to deduct the cost of these items, if necessary, from your actual overhead cost by subtracting the amount from total indirect expenses.