About Predetermined Overhead Rate Calculator (Formula)
A Predetermined Overhead Rate (POHR) Calculator is a tool used in cost accounting and managerial accounting to determine the rate at which overhead costs will be allocated to products or projects during a specific accounting period. Overhead costs include expenses such as rent, utilities, depreciation, and indirect labor, which are not directly tied to specific units of production but are incurred to support overall operations. Calculating the predetermined overhead rate involves a specific formula:
Predetermined Overhead Rate (POHR) = Estimated Overhead Costs for the Period / Estimated Activity Level (Allocation Base)
Where:
- Predetermined Overhead Rate (POHR) is the rate at which overhead costs will be allocated to products or projects, typically expressed per unit of activity or per direct labor hour.
- Estimated Overhead Costs for the Period is the total expected overhead expenses for the accounting period, which may include items like rent, utilities, and depreciation.
- Estimated Activity Level (Allocation Base) is the expected level of activity chosen as the basis for allocating overhead costs. Common allocation bases include direct labor hours, machine hours, or units produced.
The formula calculates the predetermined overhead rate by dividing the estimated overhead costs for the period by the estimated activity level. This rate is then used to allocate overhead costs to products or projects based on the actual level of activity during the period.
Predetermined Overhead Rate Calculators are essential tools for cost accountants, financial analysts, and business managers. They play a crucial role in assigning indirect costs to products or projects for the purpose of cost allocation, pricing decisions, and performance evaluation. Accurate calculation and application of the predetermined overhead rate help businesses manage costs effectively and make informed financial decisions.