Predetermined Overhead Rate Calculator
(Based on Direct Labor Hours)
Please enter valid positive numbers for both fields. Hours cannot be zero.
Predetermined Overhead Rate
$0.00
per Direct Labor Hour
Calculate Applied Overhead
What is a Predetermined Overhead Rate?
In managerial accounting, the Predetermined Overhead Rate (POR) is an allocation rate used to apply the estimated cost of manufacturing overhead to cost objects (such as specific jobs or products) for a specific reporting period. This rate is established at the beginning of the period, rather than at the end, allowing companies to estimate job costs in real-time.
While overhead can be allocated based on machine hours or direct material costs, Direct Labor Hours (DLH) is one of the most common allocation bases, particularly in labor-intensive industries where human effort drives the majority of indirect costs.
The Formula
To calculate the Predetermined Overhead Rate using Direct Labor Hours, use the following formula:
Predetermined Overhead Rate = Estimated Total Manufacturing Overhead Costs / Estimated Total Direct Labor Hours
Input Definitions
- Estimated Total Manufacturing Overhead Costs: The sum of all indirect manufacturing costs (indirect materials, indirect labor, factory utilities, depreciation, etc.) budgeted for the upcoming period.
- Estimated Total Direct Labor Hours: The total number of hours that direct labor employees are expected to work during the same period. This serves as the "allocation base."
Why Calculate POR based on Direct Labor Hours?
Using Direct Labor Hours as an allocation base implies that there is a strong correlation between the time employees spend working and the overhead costs incurred. For example:
- Accuracy for Manual Processes: In a factory where products are hand-assembled, more labor hours typically mean more supervision, more lighting/heating usage, and more indirect supplies.
- Pricing Strategy: Knowing the overhead cost per labor hour helps businesses price their products accurately to ensure profitability.
- Budgeting: It helps managers compare applied overhead (budgeted rate × actual hours) against actual overhead costs to identify variances.
Example Calculation
Imagine a custom furniture workshop, TimberCraft Inc., preparing their budget for the year:
- They estimate total overhead costs (rent, glue, sandpaper, factory insurance) will be $250,000.
- They estimate their carpenters will work a total of 10,000 direct labor hours.
Using the calculator above:
$250,000 / 10,000 Hours = $25.00 per Direct Labor Hour
This means for every hour a carpenter works on a table, TimberCraft must add $25.00 to the cost of that table to cover overhead expenses.