Predetermined Overhead Allocation Rate Calculator

Predetermined Overhead Allocation Rate Calculator

Calculation Result

function calculatePOAR() { var overhead = parseFloat(document.getElementById('totalOverhead').value); var base = parseFloat(document.getElementById('totalBase').value); var resultDiv = document.getElementById('poar-result'); var output = document.getElementById('poar-output'); var description = document.getElementById('poar-description'); if (isNaN(overhead) || isNaN(base) || overhead < 0 || base <= 0) { alert('Please enter valid positive numbers. The allocation base must be greater than zero.'); resultDiv.style.display = 'none'; return; } var rate = overhead / base; var formattedRate = rate.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 4 }); output.innerHTML = "$" + formattedRate + " per unit of base"; description.innerHTML = "This means for every 1 unit (hour, dollar, or machine cycle) of the allocation base used, $" + formattedRate + " of indirect overhead costs should be applied to the product cost."; resultDiv.style.display = 'block'; }

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Understanding the Predetermined Overhead Allocation Rate

In cost accounting, the Predetermined Overhead Allocation Rate (POAR) is a crucial metric used to assign indirect manufacturing costs to specific products or jobs. Unlike direct materials or direct labor, overhead costs (like factory rent, utilities, and supervisor salaries) cannot be traced directly to a single unit of production. Therefore, businesses must "allocate" these costs based on a logical activity driver.

The POAR Formula

POAR = Estimated Total Manufacturing Overhead Costs / Estimated Total Quantity of the Allocation Base

Common Allocation Bases

The "Allocation Base" is the activity or volume measure that drives the overhead costs. Common examples include:

• Direct Labor Hours: Used when production is labor-intensive.
• Machine Hours: Used in highly automated environments where machines drive costs.
• Direct Labor Cost: Used if higher-paid employees consume more overhead resources.
• Units Produced: Used when all products are uniform and consume resources equally.

Example Calculation

Imagine a custom furniture shop estimates its total factory overhead for the coming year to be $120,000. They decide to use direct labor hours as their allocation base and estimate that their craftsmen will work 8,000 hours during the year.

Using the calculator:

• Estimated Overhead: $120,000
• Estimated Base: 8,000 hours
• Result: $15.00 per direct labor hour

If a specific dining table takes 10 labor hours to build, the accountant will apply $150 (10 hours × $15/hour) of overhead to that table's total cost.

Why Use a Predetermined Rate?

1. Timely Pricing: Companies need to know the cost of a product immediately to set prices, rather than waiting until the end of the year when actual bills arrive.
2. Consistency: It smooths out seasonal fluctuations in overhead costs (like high heating bills in winter).
3. Budgeting: It helps management forecast profitability and set internal performance benchmarks.

Underapplied vs. Overapplied Overhead

Because the POAR is based on estimates, at the end of the fiscal year, the "Allocated Overhead" rarely matches the "Actual Overhead."

• Underapplied: Actual overhead costs were higher than what was allocated to products.
• Overapplied: Actual overhead costs were lower than what was allocated to products.

Accountants typically close these variances to the Cost of Goods Sold (COGS) account at year-end to ensure the financial statements reflect actual costs.