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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.
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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.
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.
What is the advantage of using a predetermined overhead application rate?
RUNOVER
Definition of a predetermined overhead rate?
Predetermined overhead rate is that overhead rate calculated before start of production to allocate overhead costs to units of products by using some ratio in relation to some other cost like material cost or labor cost or labor hours etc.
Does the predetermined overhead rate change in proportion to the change in predicted production Overhead rate 100000 at .10 a unit. Outputs One group- 20000 units one at 300000 one at 400000?
Predetermined overhead rate is calculated according to the normal production capacity of the plant.
What is the predetermined cost?
Predetermined rate is overhead rate allocated to product cost to find out the full product cost and it is an estimated rate based on total expected overhead on normal capacity divided by some machine hours or direct labor hours etc.
How do I compute predetermined overhead rate as a percentage of direct labor costs?
Predetermined overhead rate = Est. total Manuf. Overhead Cost / Est. total amt of allocation base In this case, allocation base would be direct labor (as opposed to machine labor). Hope this helps
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
Why do companies use a predetermined overhead rate rather than actual overhead costs to apply overhead to jobs?
because they have no life, also they predetmined pigs
Why you charge production at pre determined factory overhead rate?
The predetermined factory overhead rate is the cost associated with all products produced by the company. This helps the company easily assign cost.
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
What are the Reasons for using applied overhead versus actual overhead?
Using a predetermined rate makes itpossible to estimate total job costs sooner. Actual overhead for the period is notknown until the end of the period.
