What is Burden Rate? and how to calculate Burden Rate?

The burden rate is an amount that takes into account the indirect costs of maintaining the business, such as hiring employees and storing merchandise.

Calculating load levels shows how much your business is losing and making money after paying the required fees. Understanding load levels helps you figure out how much to charge for a product or service.

In this article, we explain what the burden rate is, why it is important and tell you how to calculate the burden rate in the business.

Contents

1 What is the burden rate?
1.1 Burden rate of labor
1.2 Burden rate inventory
2 Why is the burden rate important?
2.1 Understanding employee costs
2.2 Financial preparation
2.3 Making informed decisions
3 Formula to calculate burden rate
3.1 Labor load rate
3.2 Inventory load level
4 Cases of calculating the burden rate
4.1 Labor load rate
4.2 Inventory load rate
5 Tips for calculating the burden rate
5.1 Check load rates regularly
5.2 Record and save data
5.3 Check your number again

What is a burden rate?

Burden rate is the indirect cost of keeping the business functioning. Some examples of indirect costs include payroll taxes, paid leave, travel expenses and company benefits. Load levels provide a more complete understanding of the costs of retaining employees beyond payroll.

Using load rates gives you an accurate representation of the total absorbed costs. Absorbed costs are full consideration of labor and inventory levels.

To ensure the accuracy of the load levels, it is helpful to calculate them using certain equations. Once you calculate the load level, you know how much profit your business is making.

There are two types of load levels: labor load levels and inventory load levels.

Labor Burden rate

Workload rate refers to employee benefits. This figure shows how much it costs to keep these employees on top of their salary. Several factors of workload levels include the following:

1. Workers’ compensation
2. Driver insurance
3. Holiday
4. Paid leave
5. sick pay
6. Employee training
7. Health insurance, including dental and vision
8. Tuition reimbursement
9. Insurance
10. Student loan debt assistance
11. Retirement plan

Burden rate inventory

Inventory expense levels refer to the costs of producing, storing and distributing business inventory. Some of the aspects included in the inventory expense level include:

1. Start the engine
2. Facility operation
3. Equipment
4. Material:
5. Stocking and storage
6. Building maintenance

Why is the burden rate important?

Calculating the burden rate is very important for businesses because it gives management a better understanding of how much to charge for a product or service to make a profit.

The Burden rate also shows how much the company is spending on expenses, such as renting a location or using machinery. Business leaders can use this information to see if they can lower costs by renting or purchasing a cheaper location.

Load levels also offer the following benefits:

Understanding employee costs

When you know the level of your business expenses, you are more aware of how much it costs to have employees. You may be more likely to hire the right number of people and pay the right amount. Understanding the costs of having employees also explains how many benefits your company can offer.

Financial preparation

Expense rates give you the important financial information you need to prepare for future expenses. Being financially prepared helps you save and spend the right amount of money on your business. By recognizing labor and inventory levels, your company can prepare for unexpected costs.

Make informed decisions

Calculating load levels is critical for companies that need to make significant business decisions. Some of the challenging questions to answer include laying off employees, expanding the business or hiring additional staff.

By knowing the level of expenses, management is more informed and has a better understanding of the financial position of the business. As a result, entrepreneurs make more informed and wise decisions because of the additional data provided by load levels.

The formula for calculating the burden rate

The formula for calculating the labor load rate and the inventory load level is as follows:

Labor load rate

The labor load rate is a concise equation that takes into account labor costs and payroll costs. In this calculation, the cost of workload refers to all additional costs for the employee beyond his base salary.

Meanwhile, payroll expenses refer to the income employees are rewarded for their work. Use the formula below to calculate your company’s workload rate:

Labor load cost / payroll cost = labor load rate

Inventory load rate

Similar to the labor load rate, the inventory load rate is a simple equation. The main difference is the consideration of activity size. The activity measure is the amount of time your business is operating.

Manufacturing overhead cost (MOH), also known as factory expense, refers to the indirect costs resulting from production. An example of an audible production cost is a company’s electricity bill. Use the formula below to calculate your business’s inventory load level:

Factory overhead cost/activity size = inventory load level

Case in point of calculating burden rate

Consider the following example of calculating load rates:

Labor load rate

You have a construction business where your employees earn a salary of 35,000,000 per year. In addition to their salary, your company covers their medical benefits, which cost 10,000,000 per year. The workload rate calculation for this scenario is as follows:

10,000,000 / 35,000,000 = 0.29

For every dollar you spend on your employees, you also pay an additional $0.2 to cover the additional costs of having this team member.

Inventory load rate

Using the same construction business example, assume you pay $500,000 a month to use a truck to move equipment. Your company uses this truck 100 hours every month. The inventory load level calculation for this scenario is as follows:

500,000 / 100 = 5000

Your company is charged an additional 5000 for every hour you use the truck.

Tips for calculating the burden rate

Consider the following suggestions when calculating your business expense rates:

Check load rates regularly

The calculation of the load level involves several numbers that change over time. Make sure you calculate your load rate regularly to make sure you’re working with the latest figures.

Record and save data

Be sure to record all expense rates for your business using a formal documentation system. You can create spreadsheets and add new tabs each time you calculate load levels, then revisit your numbers from time to time.