Predetermined Overhead Rate Calculator

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Predetermined Overhead Rate Calculator

Direct Labor Hours Machine Hours

Understanding the Predetermined Overhead Rate

In cost accounting, accurately allocating manufacturing overhead is crucial for determining the true cost of products and services. Manufacturing overhead includes all indirect costs associated with production, such as factory rent, utilities, indirect labor (supervisors, maintenance staff), and depreciation of machinery. However, these costs are often incurred throughout a period, while direct costs (like raw materials and direct labor) are tracked for each specific job or batch. This timing difference makes it difficult to assign overhead costs directly to production as they occur.

This is where the Predetermined Overhead Rate (POR) comes in. The POR is an estimated rate used to apply manufacturing overhead to products or services. It's calculated before the accounting period begins, using estimates of total overhead costs and a measure of activity (the allocation base) expected during that period. This allows businesses to cost their products more consistently and timely.

How the Predetermined Overhead Rate is Calculated

The basic formula for the Predetermined Overhead Rate is:

Predetermined Overhead Rate = Estimated Total Manufacturing Overhead / Estimated Total Amount of Allocation Base

The "Allocation Base" is a measure of activity that is believed to drive overhead costs. Common allocation bases include:

  • Direct Labor Hours: Assumes that overhead is driven by the amount of labor time spent on production.
  • Machine Hours: Assumes that overhead is driven by the amount of time machinery is used in production.
  • Direct Labor Cost: Assumes overhead is proportional to the direct labor wages paid.
  • Units Produced: Assumes overhead is driven by the volume of output.

The choice of allocation base is critical. It should be the base that has the strongest correlation with the actual overhead costs incurred. For example, if a factory is highly automated, machine hours might be a more appropriate base than direct labor hours.

Why Use a Predetermined Overhead Rate?

  • Timely Product Costing: Allows for the assignment of overhead to jobs as they are completed, rather than waiting until the end of the accounting period.
  • Cost Stability: Smooths out fluctuations in overhead costs that might occur due to seasonal production levels or variations in machine usage.
  • Budgeting and Planning: Aids in the budgeting process by providing an estimated rate for costing future production.

Using the Calculator

To use this calculator, you will need to input your best estimates for the entire accounting period:

  • Estimated Total Manufacturing Overhead: This is the sum of all indirect manufacturing costs you anticipate incurring for the period (e.g., rent, utilities, indirect labor, depreciation).
  • Estimated Total Direct Labor Hours: The total number of direct labor hours you expect to be used in production during the period.
  • Estimated Total Machine Hours: The total number of machine hours you expect to be utilized in production during the period.
  • Predetermined Allocation Base Unit: Select the primary measure of activity that you believe drives your overhead costs.

The calculator will then compute your Predetermined Overhead Rate based on your selections.

function calculatePredeterminedOverheadRate() { var estimatedTotalManufacturingOverhead = parseFloat(document.getElementById("estimatedTotalManufacturingOverhead").value); var estimatedTotalDirectLaborHours = parseFloat(document.getElementById("estimatedTotalDirectLaborHours").value); var estimatedTotalMachineHours = parseFloat(document.getElementById("estimatedTotalMachineHours").value); var predeterminedAllocationBaseUnit = document.getElementById("predeterminedAllocationBaseUnit").value; var resultDiv = document.getElementById("result"); var predeterminedOverheadRate = 0; if (isNaN(estimatedTotalManufacturingOverhead) || estimatedTotalManufacturingOverhead < 0) { resultDiv.innerHTML = "Please enter a valid estimated total manufacturing overhead."; return; } if (predeterminedAllocationBaseUnit === "directLaborHours") { if (isNaN(estimatedTotalDirectLaborHours) || estimatedTotalDirectLaborHours <= 0) { resultDiv.innerHTML = "Please enter a valid estimated total direct labor hours (greater than zero)."; return; } predeterminedOverheadRate = estimatedTotalManufacturingOverhead / estimatedTotalDirectLaborHours; } else if (predeterminedAllocationBaseUnit === "machineHours") { if (isNaN(estimatedTotalMachineHours) || estimatedTotalMachineHours <= 0) { resultDiv.innerHTML = "Please enter a valid estimated total machine hours (greater than zero)."; return; } predeterminedOverheadRate = estimatedTotalManufacturingOverhead / estimatedTotalMachineHours; } else { resultDiv.innerHTML = "Please select a valid allocation base unit."; return; } if (predeterminedOverheadRate === 0) { resultDiv.innerHTML = "Calculation resulted in zero. Please check your inputs."; return; } resultDiv.innerHTML = "Estimated Total Manufacturing Overhead: $" + estimatedTotalManufacturingOverhead.toLocaleString() + "" + "Chosen Allocation Base: " + predeterminedAllocationBaseUnit.replace(/([A-Z])/g, ' $1').trim() + "" + "Estimated Total " + predeterminedAllocationBaseUnit.replace(/([A-Z])/g, ' $1').trim() + ": " + (predeterminedAllocationBaseUnit === "directLaborHours" ? estimatedTotalDirectLaborHours.toLocaleString() : estimatedTotalMachineHours.toLocaleString()) + "" + "Predetermined Overhead Rate: $" + predeterminedOverheadRate.toFixed(2) + " per " + predeterminedAllocationBaseUnit.replace(/([A-Z])/g, ' $1').trim() + ""; }

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