Calculating the Actual Overhead Rate

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

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

A common formula is:

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

• Total YTD Direct Labor includes balances in accounts 601.00, 602.00, and any other user-defined labor posting accounts.
• Total YTD Revenue includes the total balance of your 400-level accounts.

Size of Job Cost Variance

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

If your firm has a significant Job Cost Variance (more than 5% of the total labor cost), the direct labor figures 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.

Types of Contracts

The calculation of actual overhead can also depend on the varieties of 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 the total indirect expenses.

If you compare your firm's operating results with industry statistics, it is important to calculate the actual overhead rate to ensure that you compare your results with all other firms on a consistent and accurate basis.

If the labor job cost rate includes some indirect expenses, Vision 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.