Burden Rate

Burden: Think a fat ox, loaded down with taxes, hauling duties, and lawyers. Fat ones.

There are two main types of costs in accounting for an industry: direct costs and indirect costs. Direct costs include employee wages, raw materials, and manufacturing supplies...while indirect costs are expenses such as employee benefits, rent, utilities, and general and administrative salaries for employees who aren’t involved with manufacturing. These are said to “burden” the really important direct costs.

Also known as overhead, to calculate the burden rate for one person working in labor, for example, you would simply divide the person’s total benefits amount by their salary to get a decimal. If someone is earning $100,000 and the cost of their benefits is $50,000, then the burden rate is $0.50 per one dollar of wages. You want the burden rate to be as low as possible.

This information can be useful for calculating the true cost of running a business, and to help decide if you are profitable or need to relocate or lay off workers as you cuddle with robots, just hoping your new metallic masters don't unionize.

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Finance: What is overhead?14187 Views

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finance a la shmoop. what is overhead? it's a bird it's a plane it's Shmooperman!

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yeah okay we couldn't resist. any on its overhead but has nothing to do with [man wearing cape flies across the sky]

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overhead. alright your company is slink Inc. you make yes of course slinkys. they

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walk downstairs a loner in pairs and make a slinkity sound.

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yeah those. your primary costs in making them are miles and miles and miles of

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flattish wire that kind of smells funny. and then a twisty machine thing then you

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heat them up so they remain in that slinky shape forever and well you're

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pretty much. done sorta. you've made the product but like where does that product

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to live? well you store it here in the slinky condo birthing chamber and you [slinky in a log cabin]

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have to rent the warehouse where all of these things live until they get shipped

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off to you know the good boys and girls and men with midlife crises all around

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the world. all right well that rent is overhead. the shipping of the product

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overhead. insurance you need to maintain so that if a slinky drops on someone's

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head and spins their hair all around they have to shave or at least that's

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the reason we're giving for our baldness at home. that insurance overhead. the

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lawyers who had to defend that a head case yep overhead. overhead is basically

01:23

everything that isn't directly useful at least in getting a product built and

01:28

bought. and it's usually a fixed cost meaning that you can't usually get rid

01:32

of overhead no matter how hard you try. like rent lawyers insurance yeah go

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negotiate with them. they charge what they charge each month and there's just

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not a whole lot you can do about it even if you want it to. oh and the CEO of the [woman throws stacks of cash on a desk]

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company the one who meets with Wall Street people and shakes hands with the

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people at Amazon well she's overhead. - yeah they really

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should put a warning on those things. [man frowns]

Find other enlightening terms in Shmoop Finance Genius Bar(f)