Calculating Your Labor Burden Rate

Calculating Labor Burden Rate

We know that maximizing profit is the main objective for our business owners and doing it accurately helps to increase those odds. That is why the labor burden rate is so important and is detrimental when left out of the equation.


What is Labor Burden Rate?

Labor Burden Rate is the rate in which indirect costs of things like inventory or labor are applied to direct costs. When you apply the burden rate to direct costs you will get an accurate total of your entire absorbed costs. 

It is sometimes known by other names like manufacturing burden, indirect production costs, or factory overhead, none of which actually help in making it easier to recognize or account for.

It is also not uncommon for businesses to forget to calculate the burden rate which leads to a decrease in profitability as you’ll have unaccounted for costs.


How to Calculate Labor Burden Rate

The burden rate is a dollar amount, which is the dollars of labor burden per one dollar of wages.For example, a burden rate of $0.50 means you spend $0.50 on indirect labor costs for every dollar of gross wages you pay.

There are two things to consider when calculating it:


  • Inventory 
  • Labor 

And the equations are fairly simple:




Labor Burden Rate = Indirect Costs / Direct Payroll Costs





Inventory Burden Rate = Manufacturing Overhead Cost / Activity Measure


What Are The Differences Between Labor Burden Rate vs. Overhead? 

These two are not quite the same though when explained can sound similar. The difference being that burden rate is an incurred cost caused by having an indirect cost in labor or cost of making your inventory, while overhead consists of additional internal costs like marketing or buying paper supplies. 

Labor Burden Rate applies to the expenses that go along with having employees that aren’t billable to clients and can include payroll taxes, health insurance, travel allowances, fringe benefits, worker’s compensation, cell phone allowances and other benefits that may be offered to your employees. This would all relate to labor burden rates. To learn your labor burden rate you divide your labor burden cost by wage costs. You can choose to include additional indirect costs into your burden rate, but they must apply to the business.


What Are The Benefits of Knowing Your Labor Burden Rate?

Burden Rate is vital when reporting a company’s full cost of labor. It’s especially useful to businesses who may need to consider laying off employees or need to change their operation for other low-cost labor sources. 

When calculated for inventory the burden rate helps by highlighting how much it takes to produce a product. It can help decide the minimum amount that the product should be priced to sell based on the total cost it takes to manufacture it. 

Businesses need to remember to update their burden rates often, as they can fluctuate with constantly changing inventory and labor situations. If not regularly attended to, it can burn a hole in any business pocket quickly.

Most businesses don’t have to stress too much though, as accountants are trained to recognize and calculate for burden rate naturally. At Atherton and Associates, our highly trained staff is well versed in calculating burden rates.

Contact Atherton to talk with a certified Accountant today and learn more about your burden rate.