In accounting burden rate can be defined as the allocation rate at which the indirect costs are allocated to the direct cost of that of inventory and labor. Burden costs are added to both inventory and labor direct costs if a business wants to calculate the absorbed costs of the inventory and the labor. Burden rate can be explained with two different perspectives as described under:-

Labor Perspective

The total labor of an employee is the sum of wages of the employee, payroll taxes and other benefits are also included total labor cost of an employee. Burden rate in terms of labor can be defined as the dollar amount of burden or overhead on the one dollar wage of the employee. For example, if the annual benefits and payroll taxes associated with an individual is $20,000 and his wages are $80,000, then the burden rate is $0.25 per $1.00 of wages.

Inventory Perspective

The total cost of the inventory is the accumulation of the direct labor costs, direct material costs and the total manufacturing overhead costs of the manufacturing process. The accumulation of all these costs are considered to be the burdened cost and this type of burden rate is calculated on the biases of direct labor hours used in manufacturing the product. Sometimes instead of labor hours some other measures can be used such as machine hours and related.

There are two different formulas for calculating two different burden rates for example

Labor Burden Rate = Labor Burden Cost/ Payroll Cost

Inventory Burden Rate = Manufacturing Overhead Cost/Activity Measure

 

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