Overhead recovery rate is the amount of overhead recovered in relation to the direct costs of production. So if the overhead recovery rate is 30 percent, then for every $1 of direct costs, the company will have an additional $0.30 incurred in overhead while operating at normal capacity. This formula is beneficial to determine how much overhead goes into production of a good.
Determine fixed production overhead. This is comprised of items that are an indirect cost to the production of a good, such as manager's wages, which are also fixed in nature. A fixed cost is one that does not change based on changes in output of the product or service. Fixed production overhead must be both fixed and indirect.
Determine direct costs. Direct costs are costs tightly associated with the production of a good. A company can trace a direct cost to actual production of a good or service, such as labor used to produce the good or service or the cost of material used in production.
Divide fixed production overhead by direct costs, which equals the overhead recovery rate. For example, if there was $100 in fixed production overhead costs and $1000 of direct costs, then $100/$1000 equals 0.1, or 10 percent. So for every $1 of direct costs, a company will have $0.10 of fixed production overhead costs.
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