Burden rate is the indirect costs that are associated with either employees or the inventory of the company. In actuality, the burden rate is the rate with which indirect costs are allocated to the direct costs to make these indirect costs a part of the direct cost incurred. This rate is usually applied to the labor in the calculation of their payrolls or in calculation of inventory costs.
Since the payment for the labor is an expense to the business, it is better if this expense is accounted properly in the accounts of business. This will help the business in determining its labor costs and profitability in an accurate manner. Therefore, to account all the expenses related to the labor in an accurate way, burden rate is applied to the labor costs. In addition to payroll costs, the company is incurring a heavy amount of expenses on the employees of the company. These expenses are usually hidden costs, and sometimes they are not disclosed. Typically, these costs include travel expenses, worker’s compensation, training and development costs, pension contribution by the employer on the behalf of employee and other expenses. If a company records all these costs in a proper manner, this will provide it with a better figure of cost spent on the labor for the period.
If a company includes the burden rate with the basic payroll costs, it is possible that this figure is 50% higher than that of payroll costs alone. If a company takes this burden rate and excessive costs into account, the additional expenses on the employees can be cut to half, and this can affect the profitability of the company in a positive manner and considerably reduce the expenses related to the labor costs.
In inventory, manufacturing overheads are included in the costs of the direct material and direct labor. This helps the company in providing a better estimate for the burden costs, and this allows the company to cut back the expenses to reduce these overhead's costs. Again, this will help in inflating the profits of the company and reduce the unnecessary expenses. Sometimes, the term factory overhead is also used for the burden rate.