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Predetermined Overhead Rate Calculation (Step by Step)The predetermined overhead rate equation can be calculated using the below steps:
ExamplesExample #1Suppose that X limited produces a product X and uses labor hours to assign the manufacturing overhead cost. The estimated manufacturing overhead was $155,000, and the estimated labor hours involved were 1,200 hours. You are required to compute a predetermined overhead rate. Solution Here the labor hours will be base units. Use the following data for the calculation of a predetermined overhead rate.
Calculation of the predetermined overhead rate can be done as follows: =150000/1200 The predetermined Overhead Rate will be – Predetermined Overhead Rate = 125 per direct labor hour Example #2Gambier is head of TVS Inc. He is considering the launch of the new product, VXM. However, he wants to consider the pricing for the same. Therefore, he has asked the production head to develop the details of costing based on existing product overhead costs to apply the same to product VXM while making its pricing decisions. The details from the production department are as follows:
The production head wants to calculate a predetermined overhead rate, as that is the main cost allocated to the new product VXM. Therefore, you are required to calculate the predetermined overhead rate. As the production head wants to calculate the predetermined overhead rate, all the direct costs will be ignored, whether direct costDirect cost refers to the cost of operating core business activity—production costs, raw material cost, and wages paid to factory staff. Such costs can be determined by identifying the expenditure on cost objects.read more (labor or material). Solution Calculation of Total Manufacturing Overhead The total manufacturing overheadManufacturing Overhead is the total of all the indirect costs involved in manufacturing a product like Property Tax on the production premise, Remunerations of maintenance personnel, Rent of the manufacturing building, etc. read more cost will be variable overhead, and fixed overhead, which is the sum of 145,000 + 420,000 equals 565,000 total manufacturing overhead. =145000+420000 Total Manufacturing Overhead = 565000 Here the labor hours will be base units Calculation of the predetermined overhead rate can be done as follows: =565000/8500 The predetermined Overhead Rate will be – = 66.47 per direct labor hour Hence, this predetermined overhead rate of 66.47 shall be applied to the pricing of the new product VXM. Example #3Company X and Company Y are competing to acquire a massive order as that will make them much recognized in the market, and also, the project is lucrative for both of them. After going to its terms and conditions of the bidding, it stated the bid would be based on the overhead rate percentage. Therefore, the one with the lower shall be awarded the auction winner since this project would involve more overheads. Both of the companies have reported the following overheads.
You must calculate the predetermined overhead rate based on the above information and determine the chances of which company is more? Solution: We shall first calculate the total manufacturing overhead cost for Company A =35000+120000+155670+45009+345600
Total Labor Hours will be – =2000*2
Calculation of Predetermined Overhead Rate for Company A is as follows =701279/4000 The predetermined Overhead Rate for Company A will be – Predetermined Overhead Rate = 175.32 We shall first calculate the total manufacturing overhead cost for Company B =38500 + 115000 + 145678 + 51340 + 351750
Total Labor Hours will be – =2500*1.5
Calculation of Predetermined Overhead Rate for Company B is as follows =702268/3750 The predetermined Overhead Rate for Company B will be – Predetermined Overhead Rate = 187.27 Hence, preliminary, company A could be the winner of the auction even though the labor hour used by company B is less, and units produced more only because its overhead rate is more than that of company A. Relevance and UsesCommonly, the manufacturing overhead cost for machine hours can be ascertained from the predetermined overhead rate in the manufacturing industry. However, in the case of machine production, this rate can be used to identify the expected costs, which shall allow the firm to allocate their financial resources properly, which are needed to ensure the efficient and proper working of operations and production. Further, it is stated that the reason for the same is that overhead is based on estimations and not the actuals. Recommended ArticlesThis article has been a guide to the Predetermined Overhead Rate Formula. Here we discuss the calculation of the predetermined overhead rate using its formula and downloadable excel template. You can learn more about accounting from the following articles –
What is a single predetermined overhead rate called?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.
What is a predetermined rate overhead rate?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 a single plant wide rate?The plantwide overhead rate is a single overhead rate that a company uses to allocate all of its manufacturing overhead costs to products or cost objects.
Is plantwide overhead rate the same to predetermined overhead rate?The plantwide allocation method uses one predetermined overhead rate to allocate overhead costs.
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