Predetermined Overhead Rate Calculator
This tool calculates the Predetermined Overhead Rate, a crucial metric in cost accounting used to apply manufacturing overhead costs to products or services. It helps businesses estimate costs and set prices before actual overhead costs are known.
Enter your Estimated Total Overhead Costs for a period and the Estimated Total Allocation Base for the same period (e.g., direct labor hours, machine hours, or direct labor cost). The calculator will provide the resulting rate. Ensure consistency in time periods and units.
Calculate Your Overhead Rate
Understanding the Predetermined Overhead Rate
What is a Predetermined Overhead Rate (POR)?
A Predetermined Overhead Rate is an estimated allocation rate used to apply manufacturing overhead costs to products or services. It's calculated *before* the accounting period begins using estimated figures.
Why Use a POR?
- Allows companies to calculate product/job costs during the accounting period, rather than waiting until actual overhead is known.
- Helps in estimating costs, pricing products, and bidding on jobs more quickly.
- Smooths out seasonal fluctuations in overhead costs or activity levels.
The Formula
The formula is straightforward:
Predetermined Overhead Rate = Estimated Total Overhead Costs / Estimated Total Allocation Base
Components Explained:
- Estimated Total Overhead Costs: This includes all indirect manufacturing costs like factory rent, utilities, indirect labor, depreciation on factory equipment, etc., that are expected for the period.
- Estimated Total Allocation Base: This is a measure of activity that is expected to drive or be related to the incurrence of overhead costs. Common bases include:
- Direct Labor Hours (DLH)
- Machine Hours (MH)
- Direct Labor Cost (DLC)
- Units Produced
- Material Cost
Example Calculation (Manual):
EX: A company estimates total manufacturing overhead for the coming year to be $200,000. They decide to use Direct Labor Hours as their allocation base and estimate a total of 40,000 DLH for the year. Calculate the POR:
POR = Estimated Overhead / Estimated Base
POR = $200,000 / 40,000 DLH
Result: POR = $5.00 per Direct Labor Hour.
This means for every direct labor hour worked on a job, $5.00 of overhead will be applied to that job's cost.
Predetermined Overhead Rate Examples
Click on an example to see the input and resulting rate:
Example 1: Using Direct Labor Hours (DLH)
Scenario: A small factory estimates $150,000 in overhead and 30,000 direct labor hours for the year.
1. Knowns: Estimated Overhead = $150,000, Estimated Base (DLH) = 30,000
2. Formula: POR = Estimated Overhead / Estimated Base
3. Calculation: POR = $150,000 / 30,000 DLH
4. Result: POR = $5.00 per Direct Labor Hour.
Conclusion: $5.00 of overhead is applied for each direct labor hour worked on a product or job.
Example 2: Using Machine Hours (MH)
Scenario: A highly automated plant estimates $500,000 in overhead and 100,000 machine hours for the year.
1. Knowns: Estimated Overhead = $500,000, Estimated Base (MH) = 100,000
2. Formula: POR = Estimated Overhead / Estimated Base
3. Calculation: POR = $500,000 / 100,000 MH
4. Result: POR = $5.00 per Machine Hour.
Conclusion: $5.00 of overhead is applied for each machine hour used on a product or job.
Example 3: Using Direct Labor Cost (DLC)
Scenario: A company estimates $300,000 in overhead and $600,000 in direct labor cost for the year.
1. Knowns: Estimated Overhead = $300,000, Estimated Base (DLC) = $600,000
2. Formula: POR = Estimated Overhead / Estimated Base
3. Calculation: POR = $300,000 / $600,000 DLC
4. Result: POR = 0.50 (or 50%) per Direct Labor Dollar.
Conclusion: For every dollar of direct labor cost on a job, 50 cents of overhead is applied.
Example 4: Using Units Produced
Scenario: A company producing a single product estimates $80,000 in overhead and expects to produce 20,000 units.
1. Knowns: Estimated Overhead = $80,000, Estimated Base (Units) = 20,000
2. Formula: POR = Estimated Overhead / Estimated Base
3. Calculation: POR = $80,000 / 20,000 Units
4. Result: POR = $4.00 per Unit.
Conclusion: $4.00 of overhead is applied to each unit produced.
Example 5: Service Company using Billable Hours
Scenario: A consulting firm estimates $100,000 in overhead (office rent, admin salaries, etc.) and expects consultants to log 5,000 billable hours.
1. Knowns: Estimated Overhead = $100,000, Estimated Base (Billable Hours) = 5,000
2. Formula: POR = Estimated Overhead / Estimated Base
3. Calculation: POR = $100,000 / 5,000 Billable Hours
4. Result: POR = $20.00 per Billable Hour.
Conclusion: $20.00 of overhead is applied for every hour billed to a client project.
Example 6: Departmental Rate (Assembly Dept.)
Scenario: In a company with multiple departments, the Assembly Department estimates $75,000 in specific overhead and 15,000 direct labor hours.
1. Knowns: Estimated Overhead = $75,000, Estimated Base (DLH in Assembly) = 15,000
2. Formula: POR = Estimated Overhead / Estimated Base
3. Calculation: POR = $75,000 / 15,000 DLH
4. Result: POR = $5.00 per Direct Labor Hour (for the Assembly Dept.).
Conclusion: This department applies overhead at a rate of $5 per direct labor hour.
Example 7: High Overhead, Low Base
Scenario: A specialized repair shop has high equipment costs ($250,000 overhead) but estimates only 5,000 direct repair hours.
1. Knowns: Estimated Overhead = $250,000, Estimated Base (Repair Hours) = 5,000
2. Formula: POR = Estimated Overhead / Estimated Base
3. Calculation: POR = $250,000 / 5,000 Hours
4. Result: POR = $50.00 per Hour.
Conclusion: The high rate reflects the significant overhead cost spread over relatively few hours.
Example 8: Low Overhead, High Base
Scenario: A basic assembly line has low overhead ($40,000) but high activity (200,000 units produced).
1. Knowns: Estimated Overhead = $40,000, Estimated Base (Units) = 200,000
2. Formula: POR = Estimated Overhead / Estimated Base
3. Calculation: POR = $40,000 / 200,000 Units
4. Result: POR = $0.20 per Unit.
Conclusion: The low rate reflects the low overhead cost spread over many units.
Example 9: Using Raw Material Cost
Scenario: A furniture maker estimates $120,000 in overhead and $400,000 in direct material cost for the year.
1. Knowns: Estimated Overhead = $120,000, Estimated Base (Material Cost) = $400,000
2. Formula: POR = Estimated Overhead / Estimated Base
3. Calculation: POR = $120,000 / $400,000 Material Cost
4. Result: POR = 0.30 (or 30%) per Direct Material Dollar.
Conclusion: For every dollar of direct material cost on a job, 30 cents of overhead is applied.
Example 10: Annual Calculation
Scenario: An advertising agency estimates annual overhead at $360,000 and expects total billable hours across all staff to be 18,000.
1. Knowns: Estimated Overhead (Annual) = $360,000, Estimated Base (Annual Billable Hours) = 18,000
2. Formula: POR = Estimated Overhead / Estimated Base
3. Calculation: POR = $360,000 / 18,000 Hours
4. Result: POR = $20.00 per Billable Hour.
Conclusion: The annual predetermined rate is $20 per billable hour.
Frequently Asked Questions about Predetermined Overhead Rate
1. What is a Predetermined Overhead Rate (POR)?
It's a rate calculated before an accounting period begins to apply estimated overhead costs to production or services based on an estimated activity level (the allocation base).
2. Why is it called "predetermined"?
Because it is calculated and set *before* the actual overhead costs and activity levels for the period are known.
3. What is the formula for POR?
POR = (Estimated Total Manufacturing Overhead Costs) / (Estimated Total Allocation Base).
4. What are common allocation bases?
Common bases include Direct Labor Hours, Machine Hours, Direct Labor Cost, or Units Produced. The best base is one that drives or correlates with the overhead costs.
5. What kind of costs are included in "Estimated Total Overhead Costs"?
Indirect manufacturing costs like factory rent, utilities, depreciation on factory equipment, indirect labor, indirect materials, etc.
6. Can the allocation base be zero?
No. If the estimated allocation base is zero, the calculation involves division by zero, which is mathematically undefined and would result in an infinite rate. The tool requires a positive allocation base.
7. What happens if actual overhead or activity differs from the estimates?
This results in overapplied or underapplied overhead. The difference is typically adjusted at the end of the accounting period, often by adjusting Cost of Goods Sold.
8. Do companies use only one POR?
Many companies use a single plant-wide rate, but others use departmental rates or even activity-based costing (ABC) which uses multiple rates based on different activities.
9. How often is the POR calculated?
Typically, it's calculated annually, at the beginning of the fiscal year, and used consistently throughout that year.
10. How is the calculated rate used?
The rate is multiplied by the *actual* amount of the allocation base incurred on a specific job or product to assign (apply) overhead cost to it. For example, if the rate is $5/DLH and a job uses 10 DLH, $50 of overhead is applied to that job.
