Predetermined Overhead Rate Calculator
Calculation Results
Understanding the Predetermined Overhead Rate (POHR)
In cost accounting, specifically for scenarios like McCullough's manufacturing environment, a predetermined overhead rate is used to apply manufacturing overhead costs to products or jobs. This allows a company to estimate the cost of production before the actual accounting period ends.
The Single Plantwide Rate Method
When a company "uses only one predetermined overhead rate," it is employing what is known as a Plantwide Overhead Rate. This simplifies the accounting process by grouping all indirect costs into a single pool and distributing them based on one cost driver, such as direct labor hours, machine hours, or direct labor dollars.
The Formula for Calculation
To calculate the rate, McCullough would follow these steps:
- Identify the Estimated Total Overhead: The sum of all indirect manufacturing costs (rent, utilities, indirect labor).
- Select an Allocation Base: The measure used to assign costs (e.g., total machine hours).
- Divide:
POHR = Estimated Total Manufacturing Overhead / Estimated Total Allocation Base - Apply:
Applied Overhead = POHR × Actual Activity Level
Practical Example
Assume McCullough estimates total overhead at $500,000 for the year and expects to work 20,000 direct labor hours. The POHR would be $25.00 per direct labor hour. If a specific job actually uses 100 hours, McCullough would apply $2,500 of overhead to that job ($25 x 100).
Note: At the end of the year, McCullough must compare the Applied Overhead to the Actual Overhead incurred to determine if the overhead was underapplied or overapplied.