1. What is the Predetermined Overhead Rate?

The predetermined overhead rate is a factor used in cost accounting to allocate manufacturing overhead costs to products or job orders. It's calculated before a period begins and is used to apply overhead costs throughout the accounting period.

2. How Does the Calculator Work?

The calculator uses the predetermined overhead rate formula:

Where:

• Estimated Overhead Costs — Total expected indirect manufacturing costs
• Estimated Allocation Base — Expected level of activity (e.g., direct labor hours, machine hours, or units produced)

Explanation: This rate helps companies allocate overhead costs to products based on a consistent measure, providing more accurate product costing.

3. Importance of Predetermined Overhead Rate

Details: Accurate overhead allocation is crucial for determining product costs, setting prices, valuing inventory, and making informed business decisions about product profitability.

4. Using the Calculator

Tips: Enter estimated overhead costs in currency units and estimated allocation base in appropriate units (hours, units, etc.). Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What are common allocation bases used?
A: Common allocation bases include direct labor hours, machine hours, direct labor costs, and units produced.

Q2: Why use a predetermined rate instead of actual overhead?
A: Predetermined rates allow for consistent product costing throughout the period, rather than waiting until period end when actual overhead is known.

Q3: How often should the predetermined rate be updated?
A: Typically, companies set a new predetermined overhead rate at the beginning of each fiscal year based on budgeted amounts.

Q4: What happens if actual overhead differs from applied overhead?
A: The difference is recorded as either underapplied or overapplied overhead and is adjusted at period end.

Q5: Can this rate be used for service industries?
A: Yes, service companies can use predetermined overhead rates to allocate indirect costs to services provided.