Predetermined Overhead Rate Calculator
Calculate your POHR based on estimated manufacturing costs and allocation bases. Essential for job-order costing at the beginning of an accounting period.
Direct Labor Hours
Machine Hours
Direct Labor Dollars ($)
Units Produced
Predetermined Overhead Rate
$0.00
per unit of allocation base.
When is Predetermined Overhead Rate Calculated?
The predetermined overhead rate (POHR) is calculated at the beginning of the accounting period (usually the start of the fiscal year), before any actual manufacturing overhead costs are incurred or recorded.
This timing is critical because it allows companies to apply overhead costs to jobs or products in real-time as they are completed, rather than waiting until the end of the year when actual total costs are known. By calculating this rate in advance, businesses can estimate job costs, set prices, and evaluate profitability immediately.
The Calculation Logic
Because the rate is determined before the period begins, it relies entirely on estimates rather than actual historical data for the current period. The formula used is:
POHR = Estimated Total Manufacturing Overhead Cost / Estimated Total Amount of the Allocation Base
Key Components
- Estimated Overhead: The total expected indirect costs (utilities, rent, supervisor salaries, depreciation) for the upcoming period.
- Allocation Base: The driver used to assign overhead (e.g., Machine Hours for automated factories, Direct Labor Hours for labor-intensive shops).
Why Calculate at the Beginning?
Calculating POHR at the start of the period solves three main problems:
- Seasonal Fluctuations: Actual overhead costs (like heating in winter) fluctuate, but the POHR smooths these out to provide a consistent unit cost throughout the year.
- Timeliness: Managers need unit cost data immediately to make pricing decisions. Waiting for actual costs at year-end is too late.
- Pricing: It ensures that the quoted price to customers covers not just direct materials and labor, but also a fair share of the factory overhead.