Predetermined Overhead Rate Calculator
Calculate your company's predetermined overhead rate (POHR) to accurately allocate indirect manufacturing costs to your products or services.
What is the Predetermined Overhead Rate (POHR)?
The Predetermined Overhead Rate (POHR) is an allocation rate used by businesses to apply estimated manufacturing overhead costs to cost objects, such as products or jobs, before the actual costs are known. This calculation typically occurs at the beginning of an accounting period (usually the fiscal year).
By using a POHR, management can estimate the cost of a job or product immediately upon completion, which is critical for pricing decisions, financial reporting, and performance evaluation.
The POHR Formula
The calculation is straightforward but requires accurate estimations of two primary variables:
Key Components of the Calculation
- Estimated Manufacturing Overhead: Includes indirect costs that cannot be traced directly to a specific unit, such as factory rent, utilities, depreciation on equipment, and indirect labor.
- Allocation Base: A measure of activity used to assign costs to products. Common bases include direct labor hours, machine hours, or direct labor dollars.
Step-by-Step Calculation Example
Suppose a furniture manufacturing company estimates its total overhead for the upcoming year to be $250,000. They decide to use direct labor hours as their allocation base and estimate that the staff will work 25,000 direct labor hours during the year.
This means for every hour a worker spends on a specific project, the company will "apply" $10 of overhead cost to that project.
Why Companies Use POHR
Actual overhead costs are often not known until the end of the month or year. If a company waited for actual bills (like electricity or seasonal maintenance) to arrive before pricing their products, they would be unable to provide quotes to customers. POHR provides a "normal" cost that smooths out fluctuations in monthly overhead spending.
Choosing the Right Allocation Base
The "base" should be the primary driver of overhead costs. In highly automated factories, Machine Hours is often the most accurate base. In labor-intensive artisan shops, Direct Labor Hours or Direct Labor Dollars are preferred. Choosing an inappropriate base can lead to "product cross-subsidization," where some products are overpriced and others are underpriced.