Direct Labor Hours
Machine Hours
Direct Labor Cost ($)
Direct Material Cost ($)
Units Produced
Please enter valid positive numbers.
0.00
per allocation unit
Total Overhead Costs:$0.00
Total Allocation Base:0
Calculation Method:Predetermined Overhead Rate
function updateLabel() {
var type = document.getElementById("baseType").value;
var label = document.getElementById("allocationBaseLabel");
if (type === "laborHours") {
label.innerText = "Estimated Total Direct Labor Hours";
} else if (type === "machineHours") {
label.innerText = "Estimated Total Machine Hours";
} else if (type === "laborCost") {
label.innerText = "Estimated Total Direct Labor Cost ($)";
} else if (type === "materialCost") {
label.innerText = "Estimated Total Direct Material Cost ($)";
} else if (type === "units") {
label.innerText = "Estimated Total Units Produced";
}
}
function calculateOverheadRate() {
// Get input values
var overheadRaw = document.getElementById("totalOverheadCosts").value;
var baseAmountRaw = document.getElementById("allocationBaseAmount").value;
var baseType = document.getElementById("baseType").value;
// Parse floats
var overhead = parseFloat(overheadRaw);
var baseAmount = parseFloat(baseAmountRaw);
// Error handling
var errorDiv = document.getElementById("errorMsg");
var resultDiv = document.getElementById("resultBox");
if (isNaN(overhead) || isNaN(baseAmount) || overhead < 0 || baseAmount <= 0) {
errorDiv.style.display = "block";
resultDiv.style.display = "none";
return;
}
errorDiv.style.display = "none";
resultDiv.style.display = "block";
// Calculation
var rate = overhead / baseAmount;
var finalRateText = "";
var rateUnitText = "";
var baseLabelText = "";
var formattedBase = "";
// Determine formatting based on type
if (typeIsCurrencyBased(baseType)) {
// Usually expressed as a percentage of cost
var percentage = rate * 100;
finalRateText = percentage.toFixed(2) + "%";
rateUnitText = "of " + getBaseName(baseType);
baseLabelText = "Total Base Cost:";
formattedBase = "$" + baseAmount.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
} else {
// Usually expressed as dollars per unit/hour
finalRateText = "$" + rate.toFixed(2);
rateUnitText = "per " + getUnitName(baseType);
baseLabelText = "Total Base Units:";
formattedBase = baseAmount.toLocaleString();
}
// Update DOM
document.getElementById("finalRate").innerText = finalRateText;
document.getElementById("rateUnit").innerText = rateUnitText;
document.getElementById("displayOverhead").innerText = "$" + overhead.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById("displayBaseLabel").innerText = baseLabelText;
document.getElementById("displayBase").innerText = formattedBase;
}
function typeIsCurrencyBased(type) {
return type === "laborCost" || type === "materialCost";
}
function getBaseName(type) {
if (type === "laborCost") return "Direct Labor Cost";
if (type === "materialCost") return "Direct Material Cost";
return "Cost";
}
function getUnitName(type) {
if (type === "laborHours") return "Direct Labor Hour";
if (type === "machineHours") return "Machine Hour";
if (type === "units") return "Unit Produced";
return "Unit";
}
// Initialize label on load
updateLabel();
What is an Overhead Application Rate?
The Overhead Application Rate, often referred to in cost accounting as the Predetermined Overhead Rate (POHR), is a metric used to allocate indirect manufacturing costs to specific cost objects, such as products or job orders. Unlike direct materials and direct labor, overhead costs (like factory rent, utilities, and supervisor salaries) cannot be directly traced to a single unit of production. Therefore, companies must "apply" these costs using a calculated rate based on an activity driver.
How to Calculate the Overhead Application Rate
The standard formula for calculating the predetermined overhead rate is typically established at the beginning of an accounting period. It is calculated as follows:
Formula:
Overhead Rate = Estimated Total Manufacturing Overhead Costs / Estimated Total Allocation Base
Step-by-Step Calculation:
Estimate Overhead Costs: Forecast all indirect costs associated with production for the upcoming period (e.g., indirect labor, factory depreciation, supplies).
Select an Allocation Base: Choose a driver that causes the overhead to be incurred. Common bases include Direct Labor Hours, Machine Hours, or Direct Labor Cost.
Estimate the Base Activity: Forecast the total amount of the allocation base (e.g., total machine hours) for the period.
Divide: Divide the estimated costs by the estimated activity base.
Choosing the Right Allocation Base
The accuracy of your cost allocation depends heavily on selecting the correct allocation base. The base should correlate strongly with the consumption of overhead resources.
Direct Labor Hours: Best for labor-intensive manual production environments.
Machine Hours: Ideal for highly automated manufacturing facilities where machinery drives costs.
Direct Labor Cost: Used when overhead rates are closely tied to wage rates, often expressed as a percentage.
Example Calculation
Imagine a furniture manufacturing company, "WoodWorks Inc." They estimate their annual overhead costs (rent, electricity, glues, indirect labor) to be $500,000. They believe that machine usage is the primary driver of these costs and estimate they will use 25,000 machine hours in the coming year.
Using the calculator above:
Total Overhead: $500,000
Allocation Base: 25,000 Machine Hours
Calculation: $500,000 / 25,000 = $20.00
The Overhead Application Rate is $20.00 per machine hour. For every hour a machine runs on a specific job, $20 of overhead cost will be added to that job's cost sheet.
Why is this Important?
Calculating an accurate overhead application rate is critical for pricing decisions and inventory valuation. If the rate is too low (underapplied overhead), products may be underpriced, leading to losses. If the rate is too high (overapplied overhead), products may be overpriced, leading to lost sales. Consistent monitoring allows managers to compare applied overhead with actual overhead incurred to make necessary adjustments.