Calculating overhead multiplier

There are companies calculating overhead multiplier (OHM) or overhead factor (OHF) every quarter while others might do that yearly. Different companies have different procedures and policies and, therefore, different ways of handling time entry and billing. The important thing is that companies must factor in the true labor costs to measure its profitability. Your bill rates must be loaded with the gross wages, overhead costs (rent, utilities, depreciation, marketing, etc.) and target profit. Similarly, your labor costs must be loaded with the payroll costs, benefits, payroll taxes, insurance costs, etc. that you pay for your employees.

Generally, companies calculate OHM, Labor Burden Rate and Bill Rate as:

Labor Burden Rate = Extra Costs / Wages

Total Costs = Wages + Extra Costs

where extra costs include annual benefits, payroll taxes paid by the company, and other costs; wages are the salaries paid to the employees.

Overhead Multiplier = Total Expenses / Total Payroll Expenses

where Total Expenses = (Total Direct Expenses + Indirect Expenses) and include overheads, operating expenses, salaries, payroll taxes, insurance, etc.

Hourly Rate = Wages / Hours Worked (2080)

Cost Rate = Pay Rate or Direct Labor x Overhead Multiplier

Bill Rate = Direct Employee Expense x (Overhead Multiplier + Profit) or

Bill Rate = Burdened Labor x Overhead Multiplier / Profit

Some government agencies will not allow any allowance and limit profit. Direct labor can be either salary expense or direct employee expense, depending on your practice or your contracts. Some companies do these calculations from the General Ledger and set up special accounts for Direct Labor and Indirect Labor. They use a simple formula to calculate overhead multiplier:

OHM = Total Indirect Expenses / Total Direct Labor

where Total Indirect Expenses are the company overheads

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