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Calculation of Overhead Cost per Worked Hour

In Costlocker, we have two methods for calculating the overhead cost per worked hour.

Basic information about the differences between the Monthly and Fixed Hourly Rates is described in a separate article.

This article concerns the calculation of the overhead hourly rate. The Calculation of the Individual Hourly Rate is described in a separate article.

How the Hourly Rate Is Calculated

Fixed Rate

In Fixed Rate mode, the overhead rate is calculated when the project is created and then does not change.

At the moment of creating the project, the total overhead cost for the given month is taken (see the article Overhead Costs) and divided by the sum of the Monthly Workloads of all people (see People -> Total from the column Monthly Workload).

Example:

We have 2 people with a monthly salary, each with 160 hours, totaling 320 hours.

Our overhead costs are $3,200.

Overhead cost per worked hour = Overhead Costs / Sum of Monthly Workloads
Overhead cost per worked hour = $3,200 / 320
Overhead cost per worked hour = $10

An overhead cost (in our case $10) per worked hour is then added to each worked hour—which we can see in the project detail.

Inaccuracies of Fixed Overhead Rate

Because the overhead cost in the project in Fixed Rate mode is recorded when the project is created and then does not change, several situations can occur that cause inaccuracies.

1. Change in Overhead Costs or Workloads

If, after creating the project, we change the amount of workloads or the amount of overhead costs, this change will not be reflected in the existing projects. Since we usually know the exact amount of overhead only after the end of the month, this inaccuracy will be very common. It is especially noticeable in projects that last several months.

2. Discrepancy Between Tracked Hours and Monthly Workloads

If we stay with the example above and in the given month our two workers do not work exactly 320 hours, but for example only 300 hours, then we will not have all costs allocated in the projects:

Hours worked on projects: 300 hours
Overhead cost per worked hour: $10
The sum of overhead costs in projects will then be 300 hours × $10 = $3,000.

Thus, in the projects, we will have overhead costs of $3,000., while the company's total overhead remains $3,200. Therefore, an inaccuracy of $200 arises, making the projects appear more profitable than they actually are.

When setting the fixed overhead rate, overhead costs are allocated only to people with a commitment (salary), not to people paid by the hour.

We can solve the inaccuracies of the fixed rate by using the monthly rate.

Monthly Rate

When using the monthly rate, the current month is always calculated the same as in Fixed Rate from the start.

However, after the end of the month, the numbers are recalculated according to the actual hours worked.

Let's stay with the example above:

Monthly overhead costs: $3,200
Monthly workload: 320 hours
Actually worked in the month: 300 hours

During the month, it will still be calculated as:

Overhead cost per worked hour = Overhead Costs / Sum of Monthly Workloads
Overhead cost per worked hour = $3,200 / 320
Overhead cost per worked hour = $10

After the end of the month, the data is recalculated according to the following formula:

Overhead cost per worked hour = Overhead Costs / Sum of Actually Worked Hours
Overhead cost per worked hour = $3,200 / 300
Overhead cost per worked hour = $10.7

These numbers are automatically allocated to all projects for the given month.

Numbers are also always recalculated if the number of tracked hours changes or if the amount of overhead costs changes.

The monthly rate also allows allocating overhead costs among hourly paid people, as it does not calculate overhead from monthly workloads (which is not known for people with an hourly rate) but from actually worked hours.

With the monthly rate, always wait until the end of the month and enter all overhead costs before evaluating the profitability of projects—otherwise, your numbers may change.

Fixed and Monthly Rate

In Costlocker, we have two methods for calculating project costs based on worked time—fixed and monthly rates.

Analysis Cost Allocation in projects

Cost analysis shows us inaccuracies between company costs and costs in projects.