Predetermined Overhead Rate Formula Calculator

Predetermined Overhead Rate Calculator

Include all indirect costs: utilities, rent, indirect labor, and maintenance.

Direct Labor Hours Machine Hours Direct Labor Cost ($) Units of Production

The total expected hours, dollars, or units for the period.

Calculation Result:

function calculatePOR() { var overhead = parseFloat(document.getElementById('estimatedOverhead').value); var baseType = document.getElementById('allocationBaseType').value; var quantity = parseFloat(document.getElementById('baseQuantity').value); var resultBox = document.getElementById('por-result-box'); var output = document.getElementById('por-output'); var interpretation = document.getElementById('por-interpretation'); if (isNaN(overhead) || isNaN(quantity) || quantity <= 0) { alert('Please enter valid positive numbers for both fields.'); return; } var rate = overhead / quantity; resultBox.style.display = 'block'; var formattedRate; var explanation = ""; if (baseType === "cost") { formattedRate = (rate * 100).toFixed(2) + "%"; explanation = "For every $1 spent on direct labor, you should apply " + formattedRate + " in manufacturing overhead costs."; } else if (baseType === "hours") { formattedRate = "$" + rate.toFixed(2); explanation = "Apply " + formattedRate + " in overhead for every direct labor hour worked on a job."; } else if (baseType === "machine") { formattedRate = "$" + rate.toFixed(2); explanation = "Apply " + formattedRate + " in overhead for every machine hour utilized."; } else { formattedRate = "$" + rate.toFixed(2); explanation = "Apply " + formattedRate + " in overhead for every unit produced."; } output.innerHTML = "Predetermined Overhead Rate: " + formattedRate; interpretation.innerHTML = explanation; }

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Understanding the Predetermined Overhead Rate

In managerial accounting, the Predetermined Overhead Rate (POR) is a key metric used to assign estimated indirect manufacturing costs to specific jobs or products. Because actual overhead costs (like utility bills or factory maintenance) aren't known until the end of the fiscal period, businesses use this rate to estimate costs in real-time.

The POR Formula

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

Common Allocation Bases

Choosing the right allocation base is critical for accuracy. It should be the primary "cost driver" for your overhead. Common choices include:

• Direct Labor Hours: Best for labor-intensive manufacturing.
• Machine Hours: Ideal for highly automated factories where machines drive costs.
• Direct Labor Dollars: Often used when labor rates vary significantly between employees.
• Units of Production: Used when a company produces very similar products in large batches.

Step-by-Step Example

Imagine "Precision Gears Inc." expects the following for the upcoming year:

• 💰 Estimated Overhead: $250,000
• ⚙️ Estimated Machine Hours: 5,000 hours

Calculation:
$250,000 / 5,000 machine hours = $50 per machine hour.

If a specific customer order requires 10 machine hours to complete, the company will "apply" $500 ($50 x 10) of overhead cost to that specific job.

Why Use This Calculator?

Calculating your POR accurately ensures that your product pricing covers all costs, not just direct materials and labor. It helps in:

1. Job Costing: Determining the true cost of individual orders.
2. Pricing Strategy: Setting prices that guarantee a healthy profit margin.
3. Financial Planning: Predicting total costs before the production cycle begins.

Note: At the end of the year, the difference between applied overhead (using this rate) and actual overhead incurred is adjusted as either "underapplied" or "overapplied" overhead.