Predetermined Overhead Rate Calculator
Calculate the rate used to apply indirect manufacturing costs to products or services.
Direct Labor Hours
Machine Hours
Direct Labor Dollars ($)
Units Produced
Materials Cost ($)
Your Predetermined Overhead Rate is:
Understanding the Predetermined Overhead Rate (POR)
In cost accounting, a Predetermined Overhead Rate (POR) is an allocation rate used to apply indirect manufacturing overhead costs to products or job orders. Since actual overhead costs (like utilities, rent, and depreciation) aren't usually known until the end of a period, managers use this estimate to price products and value inventory in real-time.
The POR Formula
The calculation is straightforward but relies on accurate estimations at the beginning of the fiscal period:
Predetermined Overhead Rate = Estimated Total Manufacturing Overhead Costs / Estimated Total Allocation Base
Key Components
- Manufacturing Overhead: All manufacturing costs except direct materials and direct labor. This includes factory rent, supervisor salaries, and machine maintenance.
- Allocation Base: A measure of activity used to assign costs to units. Common bases include direct labor hours, machine hours, or total units produced.
Step-by-Step Calculation Example
Imagine a furniture manufacturing company, "Oak & Iron," that needs to set its prices for the upcoming year.
- Estimate Overhead: The company estimates total factory utilities, rent, and indirect labor will cost $150,000 for the year.
- Select Base: They decide to use Direct Labor Hours as the base because their process is labor-intensive.
- Estimate Activity: They expect employees to work a total of 10,000 hours next year.
- Calculate: $150,000 / 10,000 hours = $15.00 per direct labor hour.
This means for every hour a worker spends building a table, the company will "apply" $15.00 of overhead cost to that table's total cost profile.
Why Use a Predetermined Rate?
Using a predetermined rate rather than actual costs offers several advantages for business owners and accountants:
- Consistency: It smooths out fluctuations in overhead costs that occur month-to-month (like high heating bills in winter).
- Timeliness: It allows managers to calculate the cost of a job immediately upon completion rather than waiting for month-end utility bills.
- Pricing: Helps in setting competitive prices based on expected total costs.