Overhead Allocation Rate Calculator
Calculate your Predetermined Overhead Rate (POHR) for accurate cost accounting.
Sum of all indirect costs (rent, utilities, indirect labor) for the period.
The total activity level estimated for the upcoming period.
What is Overhead Allocation Rate?
The Overhead Allocation Rate, often referred to as the Predetermined Overhead Rate (POHR), is a metric used in cost accounting to apply manufacturing overhead costs to products or job orders. Since overhead costs (like factory rent, electricity, and supervisor salaries) cannot be directly traced to a specific unit of product, companies must estimate a rate to allocate these costs based on a specific activity driver.
The Formula
The standard formula for calculating the overhead allocation rate is:
Overhead Rate = Total Estimated Overhead Costs / Total Estimated Allocation Base
This rate is calculated at the beginning of an accounting period to help businesses estimate costs for quoting jobs and valuing inventory before actual costs are fully known.
Choosing an Allocation Base
The "Allocation Base" is the activity driver that drives the overhead costs. Common bases include:
- Direct Labor Hours: Best for labor-intensive manufacturing processes.
- Machine Hours: Best for highly automated environments where machinery drives costs.
- Direct Labor Cost: Used when overhead correlates closely with the wages paid to workers.
Example Calculation
Imagine a furniture factory with the following estimates for the year:
| Item | Value |
|---|---|
| Total Estimated Overhead (Rent, Utils, etc.) | $500,000 |
| Allocation Base (Direct Labor Hours) | 25,000 Hours |
Calculation: $500,000 / 25,000 Hours = $20.00 per Direct Labor Hour.
This means for every hour a carpenter works on a table, the company adds $20 to the cost of that table to cover overhead expenses.
Why is this Important?
Calculating an accurate overhead rate is crucial for:
- Pricing Strategies: Ensuring product prices cover all indirect costs, not just materials and labor.
- Job Costing: Determining the profitability of specific projects or batches.
- Budgeting: Comparing estimated overhead applied versus actual overhead incurred (Over/Under-applied overhead).