Predetermined Overhead Rate Calculator
Direct Labor Hours
Machine Hours
Direct Labor Cost ($)
Units of Production
Please enter valid positive numbers. The allocation base cannot be zero.
';
return;
}
var rate = overhead / baseAmount;
var formattedResult = ";
var explanation = ";
if (type === 'dollars') {
// If base is dollars, the rate is usually expressed as a percentage
var percentage = (rate * 100).toFixed(2);
formattedResult = percentage + '% of Direct Labor Cost';
explanation = 'For every $1.00 spent on direct labor, $' + rate.toFixed(2) + ' is applied to manufacturing overhead.';
} else if (type === 'hours') {
formattedResult = '$' + rate.toFixed(2) + ' per Direct Labor Hour';
explanation = 'For every direct labor hour worked, $' + rate.toFixed(2) + ' is applied to manufacturing overhead.';
} else if (type === 'machine') {
formattedResult = '$' + rate.toFixed(2) + ' per Machine Hour';
explanation = 'For every machine hour used, $' + rate.toFixed(2) + ' is applied to manufacturing overhead.';
} else {
formattedResult = '$' + rate.toFixed(2) + ' per Unit';
explanation = 'For every unit produced, $' + rate.toFixed(2) + ' is applied to manufacturing overhead.';
}
resultDiv.style.display = 'block';
resultDiv.style.borderLeftColor = '#28a745';
resultDiv.innerHTML =
'' + formattedResult + '
' +
'' + explanation + '
';
}
How the Predetermined Overhead Rate is Calculated
In Managerial Accounting and Cost Accounting, calculating the predetermined overhead rate is a critical step in the job-order costing system. This rate allows companies to apply manufacturing overhead costs to products or job orders in real-time, rather than waiting until the end of the year when actual costs are known.
Students often encounter this concept in Quizlet study sets or accounting textbooks. The calculation is always performed before the period begins (hence "predetermined") using estimates.
The Formula
Predetermined Overhead Rate = Estimated Total Manufacturing Overhead Cost / Estimated Total Allocation Base
Components of the Calculation
- Estimated Manufacturing Overhead: This includes all indirect factory costs such as indirect labor, indirect materials, factory rent, utilities, and depreciation on factory equipment. It does not include direct materials or direct labor.
- Allocation Base: This is the driver used to assign costs. Common bases include:
- Direct Labor Hours (DLH) – commonly used in labor-intensive industries.
- Machine Hours (MH) – commonly used in automated industries.
- Direct Labor Cost ($) – creates a rate expressed as a percentage.
Example Calculation
Let's assume a furniture manufacturing company estimates the following for the upcoming year:
- Total Manufacturing Overhead: $600,000
- Total Direct Labor Hours: 40,000 hours
Using the calculator above or the formula:
$600,000 / 40,000 hours = $15.00 per Direct Labor Hour
This means that for every hour a carpenter works on a table, the company adds $15.00 to the cost of that table to cover overhead expenses.
Why do we use Estimates?
Actual overhead costs (like winter heating bills or unexpected machine repairs) fluctuate throughout the year. If companies used actual rates calculated monthly, the unit cost of products would swing wildly season to season. The predetermined rate smooths out these fluctuations, providing a consistent costing metric for pricing and inventory valuation throughout the fiscal year.