What is predetermined overhead rate?
Predetermined overhead rate concept is related to the accounting for manufacturing cost and is used to forecast manufacturing overhead allocation to the produced units or job projects over the accounting period.
Such allocation is done using certain allocation basis/drivers. It is done from the very beginning of the production process. As it is explained further, predetermined overhead rate is based on the planned (forecasted) estimates.
How to calculate predetermined overhead rate?
For this purpose first it is essential to make certain forecasts, i.e. plan what total manufacturing overhead cost would be and what total allocation basis would be for the coming accounting period.
Predetermined overhead rate formula is as follows:
All parts of the formula are estimated for a particular accounting period.
Predetermined Overhead Rate – Actual Recalculation
It is essential to note that since estimates are being used, when accountants calculate predetermined overhead rate and use it further, actual manufacturing overhead costs and also amount of actual allocation will be different, when all the actual data on all costs is know.
Therefore at the end of the accounting period recalculations should be done to have proper final result of overheads allocated to the production units or job projects. Depending on the internal accounting processes of the business such recalculation can be done from time to time, but not necessarily at the end of each accounting period.
This rate is needed in order to have certain estimates of manufacturing overhead costs and their allocated amounts before knowing the exact level of manufacturing cost
While clarifying how to find predetermined overhead rate, it is essential to know that most common allocation basis or drivers are:
- direct labor hours
- machine hours
- direct labor costs
Return from predetermined overhead rate to AccountingCorner.org home