How to Calculate Predetermined Overhead Rate per Direct Labor Hour
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Predetermined Overhead Rate Calculator
Calculate your overhead rate based on direct labor hours.
Total indirect costs expected for the period (rent, utilities, indirect labor).
Total hours your direct labor workforce is expected to work.
Predetermined Overhead Rate
$0.00 / DLH
For every hour of direct labor, allocate $0.00 of overhead.
function calculatePOR() {
var overheadInput = document.getElementById("estOverhead").value;
var hoursInput = document.getElementById("estDirectLaborHours").value;
var resultDiv = document.getElementById("porResult");
var rateOutput = document.getElementById("rateOutput");
var allocationText = document.getElementById("allocationText");
var errorDiv = document.getElementById("porError");
// Reset display
resultDiv.style.display = "none";
errorDiv.style.display = "none";
// Validation
if (overheadInput === "" || hoursInput === "") {
errorDiv.innerText = "Please fill in both fields to calculate the rate.";
errorDiv.style.display = "block";
return;
}
var overhead = parseFloat(overheadInput);
var hours = parseFloat(hoursInput);
if (isNaN(overhead) || isNaN(hours)) {
errorDiv.innerText = "Please enter valid numbers.";
errorDiv.style.display = "block";
return;
}
if (hours <= 0) {
errorDiv.innerText = "Estimated Direct Labor Hours must be greater than zero.";
errorDiv.style.display = "block";
return;
}
// Calculation
var rate = overhead / hours;
// Formatting
var formattedRate = "$" + rate.toFixed(2);
// Display Result
rateOutput.innerText = formattedRate + " per Direct Labor Hour";
allocationText.innerText = formattedRate;
resultDiv.style.display = "block";
}
How to Calculate Predetermined Overhead Rate per Direct Labor Hour
In managerial accounting and cost accounting, assigning indirect costs to products or services is a critical challenge. The Predetermined Overhead Rate (POR) helps businesses estimate overhead costs before the actual costs are known. When Direct Labor Hours (DLH) is the chosen allocation base, this rate tells you exactly how much overhead to apply for every hour your employees work on a product.
The Formula
The standard formula for calculating the predetermined overhead rate using direct labor hours as the allocation base is:
Predetermined Overhead Rate = Estimated Total Manufacturing Overhead Costs / Estimated Total Direct Labor Hours
It is important to note that these figures are estimates calculated at the beginning of the period (usually the start of the fiscal year), not actual figures calculated at the end.
Why Use Direct Labor Hours?
Choosing an allocation base is about finding the "driver" of costs. Direct Labor Hours is a common allocation base in labor-intensive industries where:
Correlation: Overhead costs (like electricity for machines, supervision, support staff) tend to increase as labor hours increase.
Tracking: Labor hours are already strictly tracked for payroll purposes, making data collection easy.
Simplicity: It provides a straightforward metric for assigning indirect costs to specific jobs or units of production.
Example Calculation
Imagine a custom furniture manufacturing company, "Oak & Timber Co." At the beginning of the year, their budget reveals the following estimates:
This means for every hour a carpenter spends building a table, the company must add $15.00 to the cost of that table to cover overhead expenses.
Applied vs. Actual Overhead
Throughout the year, you apply overhead using this predetermined rate. At the end of the year, you compare the Applied Overhead (Rate × Actual Hours Worked) against the Actual Overhead Incurred.
If Applied > Actual, overhead is Overapplied.
If Applied < Actual, overhead is Underapplied.
This variance is then usually adjusted in the Cost of Goods Sold (COGS) account.
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