A predetermined overhead rate is an allocation rate that is used to apply the estimated cost of manufacturing overhead to cost objects for a specific reporting period. It is a rate used to charge overhead cost to jobs in production; the rate is established in advance for each period by use of estimates of total manufacturing overhead cost and of the total allocation base for the period.
overhead rate. An actual or budgeted overhead cost for a given period divided by the actual or budgeted measure of production activity (such as direct labor cost, labor hours, or machine hours). Also called predetermined overhead rate when using budgeted costs. Definition. An actual or budgeted overhead cost for a given period divided by the actual or budgeted measure of production activity (such as direct labor cost, labor hours, or machine hours). Predetermined overhead rate is a rate used to charge overhead cost to jobs in production; the rate is established in advance for each period by use of estimates of total manufacturing overhead cost and of the total allocation base for the period.  The predetermined overhead rate formula is calculated by dividing the total estimated overhead costs for the period by the estimated activity base. Take direct labor for example. This rate is then used to allocate the overhead costs to the production process based on the rate and the corresponding activity base. Yes, I know it sounds confusing. :) Basically, it s a way for management to estimate overhead costs in the production process in the planning and budgeting stages before the year begins. The third step is to compute the predetermined overhead rate by dividing the estimated total manufacturing overhead costs by the estimated total amount of cost driver or activity base. Common activity bases used in the calculation include direct labor costs, direct labor hours, or machine hours. A pre-determined overhead rate is the rate used to apply manufacturing overhead to work-in-process inventory. The pre-determined overhead rate is calculated before the period begins. In other words, a predetermined rate is an estimated amount of overhead costs that managerial accountants calculate an activity base will use. This rate is then used to allocate the overhead costs to the production process based on the rate and the corresponding activity base. Yes, I know it sounds confusing. :) Basically, it s a way for management to estimate overhead costs in the production process in the planning and budgeting stages before the year begins. A predetermined overhead rate is an allocation rate that is used to apply the estimated cost of manufacturing overhead to cost objects for a specific reporting period. There are several concerns with using a predetermined overhead rate, which include: 1  Not realistic. 2  Since both the numerator and denominator of the calculation are comprised of estimates, it is possible that the result will not bear much resemblance to the actual overhead rate. 3  Decision basis. Posted in: Job-order costing system. Predetermined overhead rate is used to apply manufacturing overhead to products or job orders and is usually computed at the beginning of each period by dividing the estimated manufacturing overhead cost by an allocation base (also known as activity base or activity driver). = $8.00 per direct labor hour. Notice that the formula of predetermined overhead rate is entirely based on estimates. The overhead applied to products or job orders would, therefore, be different from the actual overhead incurred by jobs or products. This difference is eliminated at the end of the period A predetermined overhead rate is an estimated ratio of overhead costs established before an accounting period that are based on another variable and used to allocate costs during the production process. This rate is then used to allocate the overhead costs to the production process based on the rate and the corresponding activity base. Yes, I know it sounds confusing. :) Basically, it s a way for management to estimate overhead costs in the production process in the planning and budgeting stages before the year begins.
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predetermined overhead rate definition