What is Burden Rate?
The burden rate is the rate at which indirect costs are applied to direct costs of inventory or labor.
How it Works
Manufacturers need to monitor the cost of their output.
If using the full costing method, they determine all the costs of production.
Some costs are direct costs, such as direct labor.
Direct labor costs can be attributed directly to unit cost
For example, it will take a certain number of employee hours to produce a batch of goods.
Employees working on a production line will be paid a certain rate per hour.
With this information, you can calculate the direct labor cost component.
So far, though, this costing only includes hourly labor rates paid for direct hourly labor input.
Employees will receive other benefits whether they are working or not.
With full costing, these benefits need to be added to the hourly pay rate.
To do this, manufacturers add a burden rate to direct labor costs.
Labor burden costs are calculated by first finding average burden cost per hour.
Then dividing hourly rates by average burden cost per hour.
This is expressed as a dollar amount per $1 of wages.
Once calculated, this burden rate can be applied to direct labor costs for batch costings.
The total will then show fully burdened costs.