Departmental overhead rate

A departmental overhead rate is a separate absorption rate calculated for each production department, using the cost driver most relevant to that department, improving accuracy over a single plantwide rate.

ByHoang TruongUpdated June 30, 2026

FrameworkOverhead absorption

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Machining absorbs overhead at €240,000 divided by 30,000 machine hours, or €8 per hour; assembly absorbs €180,000 divided by 60,000 labour hours, or €3 per hour. A product using 2 machining hours and 4 assembly hours picks up €16 plus €12, totalling €28 — more accurate than one plantwide rate would give.

Where it fits

SubjectCost AccountingAdvancedTopicOverhead Allocation & ABCAdvanced

The formula

LaTeX

\text{Departmental OAR} = \frac{\text{Department Budgeted Overhead}}{\text{Department Budgeted Activity}}

Variables

$D e p a r t m e n t a l O A R$: Overhead absorption rate for one specific department (€/hour)
$D e p a r t m e n tB u d g e t e d O v er h e a d$: Indirect costs budgeted for that department only (€)
$D e p a r t m e n tB u d g e t e d A c t i v i t y$: Planned activity base for that department (e.g. machine hours for a machining dept) (hours)

Calculated separately for each production department using its own most-relevant activity base

Check yourself

PracticeCORE

A firm uses departmental overhead rates. The machining department absorbs overhead at €8 per machine hour and the assembly department at €12 per direct labour hour. A production batch requires 4 machine hours in machining and 3 direct labour hours in assembly. What total overhead does the batch absorb?

Select an answer to check your understanding.