Overhead Rates

• The rate at which overhead is allocated to direct costs to charge cost objects with the proportion of the overhead costs attributable to them. This can be a lump sum, percentage, or quantity-based rate.
• An example of the use of overhead rates is to allocate overhead from material cost centers to orders by debiting the orders in proportion to the material withdrawals and crediting the material cost centers with the same amounts. This is also used to allocate sales and administration overhead.
• The rate applied to the direct costs to allocate the indirect costs.
• Overhead rates are used to pass on costs to cost centers that do not directly reference the activity used.