OVERHEAD RATE Meaning and
Definition
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Overhead rate refers to a financial term used in business and accounting to calculate the cost of indirect expenses in relation to the direct costs of a production or service. It represents the ratio of overhead expenses to direct costs and is expressed as a percentage.
Indirect costs, or overhead expenses, are the expenditures that cannot be directly attributed to a specific product or service but are necessary for the overall operation of the business. This includes expenses such as rent, utilities, administrative salaries, maintenance, and depreciation. On the other hand, direct costs refer to the expenses that can be specifically assigned to a particular product or service, such as direct labor and raw materials.
To determine the overhead rate, the total amount of the indirect costs is divided by the total direct costs and then multiplied by 100 to convert it into a percentage. The result provides an insight into the proportion of indirect expenses incurred relative to the direct expenses associated with producing goods or services.
Businesses use the overhead rate to allocate indirect costs to different products or services, enabling them to accurately price their offerings. It aids in determining the total cost of production, establishing a suitable profit margin, and making informed decisions regarding pricing, cost control, and resource allocation. The overhead rate also assists in evaluating the efficiency and profitability of various departments or business divisions, highlighting areas of improvement and cost reduction.
Common Misspellings for OVERHEAD RATE
- iverhead rate
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- oveehead rate
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- ovethead rate
Etymology of OVERHEAD RATE
The etymology of the word "overhead rate" is derived from the individual meanings of each word.
"Overhead" refers to the costs and expenses incurred by a business that cannot be directly linked to a specific project or product. These costs generally include rent, utilities, office supplies, salaries of non-project-specific employees, and other general expenses. The term "overhead" was first used in the 16th century and combines the words "over" and "head", suggesting that these costs are above or beyond the direct expenses linked to a particular project.
"Rate" refers to a measure or ratio. It comes from the Old French word "rat" meaning a "portion" or "proportion", which ultimately evolved from the Latin word "ratus" meaning "reckoned" or "considered".
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