Predetermined Overhead Rate (what it is and how to calculate it)
Uses of predetermined overhead rate
Companies employ predetermined overhead rates in a variety of ways, including:
What is predetermined overhead rate?
An allocation rate known as predetermined overhead rate applies a specific amount of manufacturing overhead to job orders or goods. Predetermined overhead is usually calculated at the start of each reporting period by dividing the anticipated manufacturing overhead costs by an allocation base. The activity driver is another name for the allocation base. Machine hours, direct materials, direct labor hours, and direct labor dollars are some examples of frequently used activity drivers.
How to calculate predetermined overhead rate
The manufacturing overhead cost is divided by the activity driver to determine the predetermined overhead rate. For instance, if machine hours were the activity driver, you would divide overhead costs by the anticipated number of machine hours. The basic steps you take to determine the predetermined overhead rate are listed below.
1. Estimate manufacturing overhead costs
These overhead expenses are those incurred as a direct result of producing goods. They cover things like upkeep of the facilities, utilities, factory supplies, and equipment depreciation. Manufacturing overhead costs may also include employee wages or salaries. However, only those staff members are taken into account when calculating overhead, such as maintenance staff, factory supervisors, and cleaning teams, whose jobs are directly related to manufacturing.
2. Estimate the activity driver
As previously mentioned, an activity driver could be machine hours, direct labor hours, or something else. If a company was an auto repair shop, they would figure out how many labor hours it took to finish a job. If you are in charge of a factory, you must make an educated guess as to how long each machine will operate each day.
3. Calculate predetermined overhead rate
The last step is to divide the manufacturing overhead hours by the activity driver to arrive at your predetermined overhead rate. For instance, if you project having $25,000 in machine hours and $15,000 in overhead costs, your predetermined overhead rate is $0. 60 per unit.
Examples of predetermined overhead rate
Examples of how to determine predetermined overhead rate are provided below:
Example 1
Let’s say that a producer of automotive parts budgeted the following expenses for the upcoming year:
FAQ
How do you calculate a predetermined overhead rate?
How to calculate predetermined overhead rate. The manufacturing overhead cost is divided by the activity driver to determine the predetermined overhead rate. For instance, if machine hours were the activity driver, you would divide overhead costs by the anticipated number of machine hours.
What is the meaning of predetermined overhead rate?
What is Predetermined Overhead Rate? Predetermined overhead rate is an allocation rate applied to products or job orders to apply an estimated cost of manufacturing overhead.
