Predetermined Overhead Rate Calculator
Calculate manufacturing overhead rates for job-order costing
Calculation Result
How Predetermined Overhead Rates Are Usually Calculated
In managerial accounting, the predetermined overhead rate (POHR) is a rate used to apply manufacturing overhead costs to products or job orders. Because actual overhead costs are not fully known until the end of a fiscal period, companies use estimates at the beginning of the year to ensure product pricing and cost control are managed in real-time.
The POHR Formula
Predetermined Overhead Rate = Estimated Total Manufacturing Overhead Cost / Estimated Total Amount of the Allocation Base
Key Components Explained
- Estimated Total Manufacturing Overhead: Includes indirect materials, indirect labor, factory utilities, and depreciation on factory equipment.
- Allocation Base (Cost Driver): A measure of activity used to assign overhead costs. Common bases include direct labor-hours, machine-hours, or direct labor dollars.
Why is it Calculated at the Start of the Period?
Calculating the rate beforehand (predetermined) allows businesses to estimate the cost of a job immediately upon completion rather than waiting for monthly or annual utility bills and maintenance invoices. This facilitates faster bidding, more accurate pricing strategies, and better financial forecasting.
Real-World Example
Imagine a furniture manufacturer, "Elite Desks," expects their total factory overhead for the upcoming year to be $1,200,000. They decide to use direct labor hours as their allocation base and estimate that their team will work 30,000 hours.
Using the formula: $1,200,000 / 30,000 hours = $40.00 per direct labor hour.
If a specific custom desk project requires 10 hours of direct labor, the company would apply $400 ($40 x 10) of overhead to that specific desk's production cost.