Departmental overhead rate

A departmental overhead rate is a standard charge based on the units of activity produced by a business segment. Overhead rates at the departmental level are usually applied in a more refined cost allocation environment, where there is a need to apply overhead costs as precisely as possible. Most organizations do not use departmental overhead rates, preferring instead to apply a simpler factory-wide overhead rate.

If this method is used, the standard cost allocation approach is to multiply a standard departmental overhead rate by the number of units of activity consumed. For example, if a machining department charges $30 of overhead per machining hour, and a job uses 2.5 hours of machine time, then the overhead allocation will be $75.