Allocation Rate Calculator
Calculate Predetermined Overhead Rates for Cost Accounting
Enter actual activity to see allocated cost for a specific job.
Understanding the Allocation Rate Calculator
In managerial accounting and cost management, the Allocation Rate (often referred to as the Predetermined Overhead Rate) is a crucial metric used to assign indirect costs to specific cost objects, such as products, services, or departments. Since overhead costs like factory rent, electricity, and supervisor salaries cannot be traced directly to a single unit of product, they must be allocated based on a logical driver.
This calculator helps businesses determine the rate at which these costs should be applied, ensuring accurate product costing and pricing strategies.
How the Formula Works
The standard formula for calculating the allocation rate is:
Where:
- Total Estimated Overhead Costs: The sum of all indirect manufacturing costs budgeted for the period.
- Total Estimated Allocation Base: The total amount of the cost driver expected to be used. Common drivers include Direct Labor Hours, Machine Hours, or Direct Labor Dollars.
Why is this Important?
Without an accurate allocation rate, a company might underestimate the cost of producing an item, leading to underpricing and lost profits. Conversely, overestimating costs can lead to uncompetitive pricing.
Example Calculation
Imagine a furniture manufacturing plant. The company estimates total overhead costs (electricity, depreciation, maintenance) for the year to be $500,000. The company assumes that machine usage drives these costs and estimates that they will run machines for a total of 25,000 hours during the year.
- Overhead: $500,000
- Base (Machine Hours): 25,000
- Calculation: $500,000 / 25,000 = $20.00
The Allocation Rate is $20.00 per machine hour. If a specific table requires 5 machine hours to build, the applied overhead for that table would be $100 (5 hours × $20/hour).
Common Allocation Bases
Choosing the right base is vital for accuracy:
- Labor Intensive Industries: Often use Direct Labor Hours or Direct Labor Cost.
- Automated Industries: Often use Machine Hours.
- Service Industries: May use Billable Hours or Direct Staff Cost.