How to Calculate your Labor Burden
Why is burden rate important?
A company needs to calculate burden rates because it helps management determine how much to charge for goods and services to turn a profit. Additionally, burden rates show how much the business is shelling out for costs like renting space or operating equipment. Business executives can use this data to determine whether they can reduce costs by leasing or purchasing a less expensive location.
Burden rate also offers the following benefits:
Understanding of employee cost
Knowing your business burden rate makes it easier for you to estimate the cost of hiring employees. You might be more likely to employ the proper number of individuals and pay them fairly. Knowing how much it costs to employ people also helps you determine how many benefits your business can afford to provide.
Financial preparation
You can prepare for future expenses by using burden rates, which give you the vital financial information you need. Being prepared financially enables you to invest and spend the appropriate sum of money for your company. Recognizing the labor and inventory burden rates will help your business plan for unforeseen costs.
Informed decisions
Companies that need to make important business decisions should pay particular attention to the importance of calculating burden rates. Some difficult issues to deal with include firing employees, growing the company, or hiring more employees.
Knowing the burden rate gives management more information and a clearer picture of the state of the company’s finances. As a result of the additional information that burden rates provide, employers make more sensible and appropriate decisions.
What is burden rate?
You can accurately represent the total absorbed cost by using burden rates. Full consideration of labor and inventory burden rates is what is meant by absorbed cost. It’s helpful to calculate the burden rate using a specific equation to ensure its accuracy. You can determine the amount of profit your company is making once you calculate the burden rate.
The labor burden rate and the inventory burden rate are the two different types of burden rates.
Labor burden rate
The labor burden rate refers to employee benefits. This figure reflects the total cost of keeping these employees, not just their salary. Some labor burden rate factors include the following:
Inventory burden rate
Formulas for calculating burden rate
The following are the formulas for calculating the labor burden rate and inventory burden rate:
Labor burden rate
The labor burden rate is a short equation that takes into account payroll costs and labor burden costs. The labor burden cost in this calculation refers to all additional costs for employees above and beyond their base pay. The employees’ pay, on the other hand, refers to the money they receive for their labor. To figure out your company’s labor burden rate, use the formula below:
Labor burden cost / payroll cost = labor burden rate
Inventory burden rate
The inventory burden rate has a straightforward equation, similar to the labor burden rate. The main distinction is the consideration of activity measure. Activity measure is the amount of time your business operates.
The term “manufacturing overhead cost,” or “factory burden,” refers to the indirect costs associated with production. Electricity costs are an example of manufacturing overheard costs. To figure out your company’s inventory burden rate, use the formula below:
Manufacturing overhead cost / activity measure = inventory burden rate
Burden rate examples
Consider the following examples of calculating burden rate:
Labor burden rate
Your employee works for you in construction and is paid $35,000 annually. Your business pays their salary as well as their $10,000 a year in healthcare benefits. In this case, the labor burden rate is calculated as follows:
$10,000 / $35,000 = $0.29
You also pay $0 extra for each dollar you spend on your employee. 2 in order to defray the additional expense of having this team member.
Inventory burden rate
Assuming the same scenario of a construction company, let’s say you pay $500 each month for a truck to transport equipment. Your company uses this truck 100 hours each month. In this case, the inventory burden rate is calculated as follows:
$500 / 100 = $5.00
Your company incurs an additional $5. 00 for every hour it uses the truck.
Additional tips for calculating burden rate
Consider the following suggestions when calculating your businesss burden rates:
Check burden rates regularly
Burden rate calculations involve several numbers that change over time. To ensure you use the most recent data, make sure to regularly calculate your burden rates.
Record and save data
Use a formal documentation system to make sure that all burden rates for your company are documented. Every time you calculate the burden rate, you can create a spreadsheet and add a new tab. Then, you can review your numbers over time.
Re-check your numbers
In most cases, burden rates entail several pieces of equipment, expenses, or salaries. It is helpful to review each expense you include in your formula before making a final calculation in order to obtain accurate results.
FAQ
What is a typical burden rate?
Labor Burden Rate The labor burden rate is the monetary burden (i e. , overhead) that is applied to one dollar of wages. For instance, the burden rate is $0 if an individual’s annual benefits and payroll taxes total $20,000 and his wages are $80,000. 25 per $1. 00 of wages.
What is a burden rate in manufacturing?
The burden rate is the rate at which indirect costs are subtracted from direct costs to produce a more accurate representation of the price of producing or providing a good or service.
What does burden mean in accounting?
The hidden labor and inventory costs that businesses incur during their manufacturing processes are referred to as burden costs. These calculations are beneficial for small businesses because burden costs can have an impact on a company’s profitability.
What are labor burden rates?
The labor burden rate is the ratio of indirect costs, such as labor or inventory, to direct costs. You will receive an accurate total of all of your absorbed costs when you add the burden rate to direct costs.
