What is a 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.

Example of a Departmental Overhead Rate

As an example of a departmental overhead rate, 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. As another example, a janitorial department charges $500 per 1,000 square feet cleaned per month. A using department has 3,000 square feet, so it is charged $1,500 per month.