There are quite a few indirect costs you might have to incur while running a business. Even though these costs are very visible, these can grow to a significant number. Without properly managing these hidden costs, it can become quite harmful to your business budget and eventually decline your productivity. As your business grows, it becomes very important to keep track of these hidden costs. You should also understand how you have to compare these costs with the direct costs. For this, you will need to find the burden rate.
When Do You Have To Use Burden Rate?
The burden rate is essentially used to find the hidden costs of having manufacturing inventory and other employees. You can simply use a burden rate calculator to find this value or use formulas, which is harder for larger values. However, it would help if you did not get confused between the different names of burden rates. It also goes by indirect production costs, labor burden, factory overhead, and other such names.
As mentioned, the burden rate is mostly used when you are trying to find the additional costs of your inventory or labor force.
Inventory:
To calculate the burden rate of your inventory, you first have to find the summation of how much you spend on material expenses for your products. In addition to that, you also need to know the production total, using equipment capacity, labor, and production hours. Once you have found out the values of each, you can find the burden by dividing the cost of materials by the total production.
For instance, if you have a machine that makes 10 products each hour and your machine runs for 6 hours every day weekly for 5 days, you will be able to make 15,600 copies. This is easily found by 10*6*5*52. This means your production total is 15,600. Say your material expenses are 50,000; your burden rate will be 3.21 in this example. This means you have to make at least $3.21 per product to cover the material expenses.
Labor:
Similar to the last example, here you have to find out the hidden costs for your labor. This will include anything and everything apart from the employee’s compensation. Starting from employment taxes to health insurance. Once you get the total of this, you have to divide it by the direct cost of the payroll to get your burden cost.
While this calculation seems quite easy, it can get hard to keep track of large numbers. This is when using a service like ReCalc can come in handy as they automate such calculations. You will get faster and more accurate results with this service. Rest assured, with them; you do not have to worry about any discrepancy in your calculations.
