For which period of time the predetermined overhead rate is generally set in advance
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Types of Predetermined Overhead rate You are free to use this image on your website, templates, etc., Please provide us with an attribution linkArticle Link to be Hyperlinked
FormulaPredetermined Overhead Rate = Estimated Overhead Cost/Estimated Units to be Allocated You are free to use this image on your website, templates, etc., Please provide us with an attribution linkArticle Link to be Hyperlinked The Overhead costsOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more can be Material, labor, manufacturing, selling, and distribution. We can calculate predetermined overhead for material using units to be allocated. For example, we can use labor hours worked, and for calculating overhead for the store department, we can use the quantity of material to be used. ExampleIn a company, the management wants to calculate the predetermined overhead to set aside some amount for the allocation of a cost unit. Therefore, they use labor hours for the apportionment of their manufacturing cost. The manufacturing cost for the year has been calculated as $ 50,000. The labor hours estimated is 10,000 hours by the company. It is calculated following the past trends of the company. Therefore, by using the above formula we get,
These are found using assumptions and are not accurate. The differences between the actual overhead and the estimated predetermined overhead are set and adjusted at every year-end. The adjusted overhead is known as over or under-recovery of overhead. Advantages
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ConclusionPredetermined overhead is determined at the beginning of the year. A large organization uses multiple predetermined overhead recovery rates to allocate its expenses to the cost centers. However, small organizations with small budgets cannot afford to have multiple predetermined overhead allocation mechanisms since it requires experts to determine the same. Therefore, the single rate overhead recovery rate is considered inappropriate, but sometimes it can give maximum correct results. It helps the management to distribute the expenses to its cost centers. Thus the organization gets a clear idea of the expenses allocated and the expected profits during the year. The concept of predetermined overhead is based on the assumption that the overheads will remain constant, and the production value is dependent on it. It helps to improve the segregation of the costs to their respective cost centers, thus making it a helping tool if used properly by the organization and if the calculations are correct after taking somewhat accurate assumptions. Recommended ArticlesThis article has guided the Predetermined Overhead Rate and its definition. Here we discuss the types of predetermined overhead rates along with an example. You can learn more about financing from the following articles –
Which overhead rate is determined in advance?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. The first step is to estimate the amount of the activity base that will be required to support operations in the upcoming period.
What is the predetermined overhead rate used for?What is a Predetermined Overhead Rate? 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.
What is predetermined overhead rate for machine hours?The predetermined overhead rate for machine hours is calculated by dividing the estimated manufacturing overhead cost total by the estimated number of machine hours. This formula refers to the predetermined overhead because this overhead total is based on estimations, rather than the actual cost.
What is the standard predetermined standard overhead rate?A predetermined overhead rate, also known as a plant-wide overhead rate, is a calculation used to determine how much of the total manufacturing overhead cost will be attributed to each unit of product manufactured. The rate is determined by dividing the fixed overhead cost by the estimated number of direct labor hours.
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