Total indirect costs expected for the coming year.
Total Driver Units (e.g., Direct Labor Hours, Machine Hours).
Enter actual hours/units to calculate Applied Overhead.
Predetermined Overhead Rate (POHR):–
Total Applied Overhead:–
* Rate represents cost applied per unit of the allocation base.
function calculateOverhead() {
// Get input values using var
var estOverheadInput = document.getElementById('estOverhead');
var estBaseInput = document.getElementById('estBase');
var actualBaseInput = document.getElementById('actualBase');
var resultsDiv = document.getElementById('results');
var pohrDisplay = document.getElementById('pohrResult');
var appliedRow = document.getElementById('appliedRow');
var appliedDisplay = document.getElementById('appliedResult');
// Parse values
var overheadCost = parseFloat(estOverheadInput.value);
var baseUnits = parseFloat(estBaseInput.value);
var actualUnits = parseFloat(actualBaseInput.value);
// Validation
if (isNaN(overheadCost) || isNaN(baseUnits) || baseUnits === 0) {
alert("Please enter valid numbers for Estimated Overhead and Estimated Base Units. Base Units cannot be zero.");
return;
}
// Calculate POHR
var pohr = overheadCost / baseUnits;
// Format Currency
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
minimumFractionDigits: 2
});
// Display POHR
pohrDisplay.innerHTML = formatter.format(pohr) + " / unit";
// Calculate Applied Overhead if actual units provided
if (!isNaN(actualUnits)) {
var appliedOverhead = pohr * actualUnits;
appliedDisplay.innerHTML = formatter.format(appliedOverhead);
appliedRow.style.display = "flex";
} else {
appliedRow.style.display = "none";
}
// Show results
resultsDiv.style.display = "block";
}
Understanding How the Predetermined Overhead Rate is Usually Calculated
In managerial accounting and cost accounting, allocating indirect costs to specific products is a critical challenge. Unlike direct materials and direct labor, manufacturing overhead cannot be traced directly to a single unit. To solve this, companies use a Predetermined Overhead Rate (POHR).
This tool helps manufacturers and service providers estimate the cost of production before the actual costs are fully known at the end of the period. This practice is central to Normal Costing systems.
The Calculation Formula
The predetermined overhead rate is usually calculated at the beginning of an accounting period (typically a year). The formula relies on estimates rather than actual historical data because the rate is used to apply costs in real-time as production occurs.
POHR = Estimated Total Manufacturing Overhead Cost / Estimated Total Amount of the Allocation Base
Components of the Calculation
Numerator (Estimated Overhead): The total expected indirect costs for the factory, including utilities, factory rent, indirect labor, depreciation on equipment, and factory supplies.
Denominator (Allocation Base): A measure of activity that drives the overhead costs. This is often referred to as the "Cost Driver."
Common Allocation Bases
To ensure the rate is accurate, the allocation base must be correlated with the incurrence of overhead costs. The most common bases include:
Direct Labor Hours: Used when production is labor-intensive.
Machine Hours: Used in highly automated manufacturing environments.
Direct Labor Cost: Used when overhead correlates with the wages paid.
Why is it Calculated at the Beginning of the Period?
The predetermined overhead rate is calculated before the period begins for several strategic reasons:
1. Timeliness: Managers need unit cost information immediately to price products and bid on jobs. They cannot wait until the end of the year when actual utility bills and maintenance costs are finalized.
2. Smoothing Fluctuations: Actual overhead costs can fluctuate seasonally (e.g., heating costs in winter). Using a predetermined annualized rate prevents unit costs from appearing artificially high in some months and low in others.
Example Scenario
Consider a furniture manufacturer, "TableCraft Inc." At the start of the year, they estimate the following:
Total Manufacturing Overhead: $600,000
Total Direct Labor Hours expected: 40,000 hours
Using the calculator above:
$600,000 / 40,000 hours = $15.00 per direct labor hour.
If a specific dining table requires 10 hours of labor to build, the company will "apply" $150 ($15.00 × 10) of overhead cost to that table, regardless of what the actual electricity bill is for that month.
Applying Overhead vs. Actual Overhead
It is important to distinguish between the Applied Overhead (calculated using the POHR) and the Actual Overhead (the real bills paid).
Applied Overhead = POHR × Actual Amount of Allocation Base Used
At the end of the period, the difference between the Applied Overhead and Actual Overhead results in a variance known as Overapplied or Underapplied overhead, which is adjusted in the Cost of Goods Sold (COGS) account.