Direct Labor Hours
Machine Hours
Direct Labor Cost ($)
Units Produced
Enter the total estimated hours, dollars, or units depending on your selection above.
Calculation Result
function calculateOverheadRate() {
var overheadInput = document.getElementById('totalOverhead');
var baseInput = document.getElementById('totalBase');
var baseTypeSelect = document.getElementById('baseType');
var resultBox = document.getElementById('result');
var rateResult = document.getElementById('rateResult');
var calculationBreakdown = document.getElementById('calculationBreakdown');
var overhead = parseFloat(overheadInput.value);
var baseAmount = parseFloat(baseInput.value);
var baseType = baseTypeSelect.value;
// Validation
if (isNaN(overhead) || isNaN(baseAmount)) {
alert("Please enter valid numbers for both estimated overhead and allocation base.");
return;
}
if (baseAmount === 0) {
alert("The allocation base cannot be zero.");
return;
}
// Calculation
var rate = overhead / baseAmount;
var formattedRate = "";
var detailedExplanation = "";
if (baseType === "Direct Labor Cost") {
// Usually expressed as a percentage for cost-based bases
var percentage = rate * 100;
formattedRate = percentage.toFixed(2) + "% of Direct Labor Cost";
detailedExplanation = "For every $1.00 of direct labor cost incurred, you should apply $" + rate.toFixed(2) + " of manufacturing overhead.";
} else {
// Usually expressed as currency per unit/hour
formattedRate = "$" + rate.toFixed(2) + " per " + baseType.replace(/s$/, "); // Remove trailing 's' for singular
detailedExplanation = "For every single " + baseType.toLowerCase().replace(/s$/, ") + ", you allocate $" + rate.toFixed(2) + " to the product cost.";
}
// Display Results
rateResult.innerHTML = formattedRate;
calculationBreakdown.innerHTML = "Formula: Estimated Overhead ($" + overhead.toLocaleString() + ") ÷ Estimated Base (" + baseAmount.toLocaleString() + " " + baseType + ")" + detailedExplanation;
resultBox.style.display = "block";
}
At what point is the predetermined overhead rate calculated?
A common question in managerial accounting is regarding the timing of this calculation. The predetermined overhead rate is usually calculated at the beginning of the year (or the beginning of the accounting period).
This timing is critical because it allows companies to estimate job costs and product costs throughout the year before the actual total overhead costs are known. If companies waited until the end of the year, they would not be able to price products effectively or value inventory during interim periods.
Why "Predetermined"?
The term "predetermined" explicitly signifies that the rate is established before the period begins. It relies on estimates rather than actual historical data for the current period, which facilitates Normal Costing.
How to Calculate the Predetermined Overhead Rate
The calculation is straightforward but requires accurate budgeting. It is a ratio of estimated costs to estimated activity.
The Formula
The standard formula used in the calculator above is:
Predetermined Overhead Rate = Estimated Total Manufacturing Overhead Costs ÷ Estimated Total Amount of the Allocation Base
Breakdown of Components
Estimated Manufacturing Overhead: This includes indirect materials, indirect labor, factory rent, utilities, and depreciation on factory equipment. It does not include selling or administrative expenses.
Allocation Base: This is the driver used to assign costs. Common bases include:
Direct Labor Hours (labor-intensive environments)
Machine Hours (automated environments)
Direct Labor Costs
Example Scenario
Consider a furniture manufacturing company, "WoodWorks Inc." At the beginning of the year, they estimate the following:
Item
Estimate
Total Manufacturing Overhead
$450,000
Total Direct Labor Hours (Allocation Base)
15,000 Hours
Using the formula:
$450,000 / 15,000 Hours = $30.00 per Direct Labor Hour
This means for every hour a carpenter spends working on a table, WoodWorks Inc. adds $30.00 to the cost of that table to account for electricity, rent, and glue (overhead).
Why is this calculation important?
Calculating this rate at the start of the period serves three main functions:
Timeliness: Managers can determine the approximate cost of a job immediately upon completion, rather than waiting for monthly bills (like electricity) to arrive.
Pricing: Accurate cost estimates allow for consistent pricing strategies throughout the year.
Smoothing: It smooths out seasonal fluctuations in overhead costs (e.g., high heating bills in winter) so that unit costs do not vary wildly from month to month.
Underapplied vs. Overapplied Overhead
Because the rate is based on estimates calculated at the beginning of the period, the amount allocated will rarely equal the actual costs incurred by the end of the year. The difference is treated as:
Underapplied Overhead: Actual costs were higher than allocated costs.
Overapplied Overhead: Actual costs were lower than allocated costs.
This variance is typically adjusted in the Cost of Goods Sold (COGS) account at the end of the period.