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Predetermined Overhead Rate Formula:
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The Predetermined Overhead Rate is a rate used to allocate manufacturing overhead costs to products or job orders. It is calculated before the period begins by dividing estimated overhead costs by an estimated allocation base.
The calculator uses the Predetermined Overhead Rate formula:
Where:
Explanation: This rate is used to apply overhead costs to products based on their usage of the allocation base during the accounting period.
Details: The predetermined overhead rate is crucial for cost accounting as it allows companies to assign overhead costs to products in a systematic way, helping in product pricing, inventory valuation, and profitability analysis.
Tips: Enter estimated overhead costs in currency units and estimated allocation base in appropriate units (e.g., hours). Both values must be positive numbers.
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 timely cost assignment since actual overhead costs may not be known until the end of the period.
Q3: How often should the overhead rate be recalculated?
A: Typically recalculated annually, but may be adjusted more frequently if cost structures change significantly.
Q4: What happens if actual overhead differs from applied overhead?
A: The difference is recorded as 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.