# Working with overhead cost but not sure how it calculates!

It is common to have overhead costs on a work order; however, the calculation of the overhead can get a bit complicated to track and figure out where it came from. In order to track how the overhead is calculated, it is important to understand where this overhead is coming from and its setup. The overhead cost can be calculated based on an amount or based on hours for the operation or quantities.

For example, if the overhead cost is going to be based on Hours (operations), a formula can be entered and assigned to an overhead code that is set to Hours. In Setup, General parameters, Formulas, an overhead formula can be created with a formula type of Overhead costs and a number or a formula can be entered in the Formula field.

This overhead formula can be assigned to an Overhead code in Common data, Costing. In the overhead code, for this example, the Formula base is set to Hours (operations) or quantities.

Once the overhead code is created, it can be assigned to a Costing dimension (Common data, Costing).

This costing dimension is assigned to a work center in Manufacturing, Technical data, Work centers. In this example, the work center is a labor work center.

The work center is assigned to a routing in Manufacturing, Technical data, Routings, Routing management, and for this example, the time unit is per hour, the run time type is Rate and the Rate is 500.

Once a work order is created and the total Release qty is 20, the system is going to calculate the overhead as follow:

QTY = 20

Rate = \$500.00

(20 / 500) = \$0.040 per hour for the run time

0.040 * 50 (from the formula) = \$2 for overhead cost

If the Formula base is Amount instead of Hours, after assigning the overhead code on the costing dimension, a rate needs to be entered on the costing dimension for the standard setup, standard run, or both.

Based on the previous routing settings, once a work order is created with a released qty of 20, the system calculates the overhead for the standard run as follow:

QTY = 20

Rate = \$500.00

(20 / 500) = \$0.040 per hour for the run time

Run time =  0.040 per hour

Standard run rate = \$30.00

(0.040 * \$30) = \$1.2

Total over head cost = 1.2 * 50 (from Formula) = \$60.00