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A predetermined overhead rate (POHR) is a rate used to apply manufacturing overhead (MOH) to work in progress inventory. To compute the POHR some preliminary work is needed. First, a measure of activity, called the cost driver, has to be selected as the basis for assigning MOH cost. Examples of cost driver may be machine hours, labour hours, raw material use, etc. Second, two estimations are required before calculations can be made: (1) the amount of MOH cost that will be incurred during the period and (2) the amount of cost driver that will be used during the same period. With these two estimations, a POHR is found as followed:
POHR = Estimated MOH cost (1) / Estimated Amount of Cost Driver (2)
With this you have the POHR! Be wary however that POHR is not the best way to apply overhead because it is a single cost driver method of applying cost. That is, the cost driver chosen may not be reflective of all situations. For example with the growing automation in production, labour hours may not be the most reflective cost drivers for items that are machine made. Secondly, the POHR is flawed when it comes to volume of production. Because the single rate is applied to all products, a low volume production that uses less cost driver than a higher volume production is applied the same amount of cost per unit as the higher volume production.
A better application of overhead is the Activity Based Costing system, which you may want to look up.
What else can I help you with?
How do you determine the overhead rate when applying overhead costs?
Using direct labor hours: Overhead rate = Total Overhead Expenses /Direct labor hours Using Machine hours: Overhead rate = Total Overhead Expenses /Machine hours
How do you calculate Overhead absorption rate apportionment?
Overhead rate : Overhead rate = total overhead cost / direct labor OR Overhead rate = Total overhead cost / machine hours.
What the meaning of blanket overhead rate?
Blanket overhead rate is the computation of a single overhead rate for one whole factory. Overhead rate is the percentage you get when comparing total overhead expenses to total expenses.
How do you calculate manufacturing overhead allocated?
To calculate manufacturing overhead allocated, first determine the total manufacturing overhead costs for the period, which can include indirect materials, indirect labor, and other overhead expenses. Next, select an appropriate allocation base, such as direct labor hours, machine hours, or units produced. Then, compute the overhead rate by dividing the total manufacturing overhead by the total units of the chosen allocation base. Finally, multiply the overhead rate by the actual amount of the allocation base used to determine the allocated manufacturing overhead.
What is a blanket overhead absorption rate?
Blanket overhead absorption rate is the rate used to allocate total overhead costs to number of produce units in traditional accounting system
What is a blanket overhead absorption rate How will you differentiate between blanket overhead rate and other overhead absorption rate?
In Blanket Overhead Absorption Rate applied is the same however it may differ if a company follow Departmental method Or frther break - up method
Why do you need applied overhead rate?
We need applied overhead rate to know about the overhead variance. Otherwise how will we know how much overhead expenses should have been incurred and how much is actually incurred? Predetermined rate multiplied by the actual unit level activity is applied overhead
What is overhead absorption rate. What are its purpose?
method of overhead absorption
When is the Predetermined overhead rate usually calculated?
The predetermined overhead rate used to apply overhead to finished jobs is determined before the period begins.
Why overhead absorption rate is important?
In absorption costing, overhead absorption rate or blanket rate is key to spread all overheads on production of volume of product, because if we don't have the overhead absorption rate manufacturing overhead cannot be spread or there is no basis for allocation of overheads on manufactured units.
What would a plantwide manufacturing overhead rate be assigned to?
what is plantwide manufacturing overhead
How do you compute predetermined overhead rate as a percentage of direct labor costs and direct labor hours?
Predetermined overhead rate based on direct labor cost = Budgeted overhead cost / direct labor cost / 100 Predetermined overhead rate based on direct labor cost = budgeted overhead cost / direct labor hours.
