Predetermined overhead rate is provided to use manufacturing overhead to commodities or task orders and is generally computed in ~ the beginning of each duration by dividing the estimated manufacturing overhead cost by an allocation base (also well-known as activity base or activity driver). Typically used assignment bases are straight labor hours, straight labor dollars, maker hours, and direct materials.

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Formula:

The formula the predetermined overhead rate is written as follows:

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Examples

Example 1:

Suppose GX company uses direct labor hrs to assign production overhead cost to task orders. The spending plan of the GX company shows an approximated manufacturing overhead expense of $8,000 for the forthcoming year. The company estimates the 1,000 straight labors hours will be functioned in the forthcoming year.

Using the above information, we have the right to compute the predetermined overhead price as follows:

Predetermined overhead rate = estimated manufacturing overhead cost/Estimated complete units in the assignment base

Predetermined overhead rate = $8,000/1,000 hours= $8.00 per direct labor hour

Notice that the formula that predetermined overhead rate is entirely based upon estimates. The overhead applied to products or project orders would, therefore, be various from the actual overhead occurs by tasks or products. This difference is got rid of at the end of the period. The removed of difference between used overhead and actual overhead is recognized as disposition of end or under used overhead.

Example 2

Albert Shoes firm calculates the predetermined overhead rate on the communication of annual direct labor hours. At the start of year 2021, the firm estimated that its full manufacturing overhead price would it is in $268,000 and also the complete direct labor expense would be 40,000 hours. The actual complete manufacturing overhead occurs for the year to be $247,800 and also actual direct labor hours worked during the year were 42,000.

Required:

Calculate Albert’s predetermined overhead rate for the year 2021.Find the amount of production overhead expense that Albert would certainly have applied to its systems of product.Solution

1. Predetermined overhead rate:

Estimated manufacturing overhead/Estimated direct labor hours= $268,000/40,000 hours= $6.7 per direct labor hours

2. Manufacturing overhead applied to products:

Actual straight labor hours worked x Predetermined overhead rate= 42,000 hrs x $6.7= $281,400

Example 3

The estimated operating and cost data because that three various companies is offered below:

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The allocation bases provided by above three companies for computer their predetermined overhead rates are:

Company A: straight labor hoursCompany B: device hoursCompany C: direct materials cost

Required: Compute predetermined overhead price for every of the above three companies.

Solution

Company A:

Estimated manufacturing overhead cost/Estimated straight labor hours$1,072,000/160,000 hours= $6.7

Company B:

estimated manufacturing overhead cost/Estimated maker hours = $630,000/140,000 hours= $4.5

Company C:

approximated manufacturing overhead cost/Estimated straight materials cost= $960,000/$600,000= $1.6

Multiple or departmental predetermined overhead rates:

The predetermined overhead rate computed above is recognized as single predetermined overhead price or plant-wide overhead rate. The is greatly used by small companies; in huge ones, each production department computes its own predetermined overhead rate. The use of multiple predetermined overhead rates might be complex and time consuming yet is thought about a more accurate method than using a single plant-wide overhead rate.

According come a inspection 34% of the manufacturing businesses usage a single plant large overhead rate, 44% usage multiple predetermined overhead rates and also rest of the suppliers use task based costing (ABC) system.

Example 4

The Blue agency uses a project order costing system and also computes separate predetermined overhead rates for the cutting and finishing departments. The following approximates were made at the beginning of the year 2021:

Cutting department:

Direct job hours: 6,000 hoursMachine hours: 48,000 hoursManufacturing overhead cost: $360,000Direct labor cost: $50,000

Finishing department:

Direct labor hours: 30,000 hoursMachine hours: 5,000 hoursManufacturing overhead cost: $486,000Direct labor cost: $270,000

The overhead price of cut department is based on device hours and also that of finishing room on direct labor cost.

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Required: work out predetermined overhead price for each of the above two departments.

Solution

Cutting department:

Estimated manufacturing overhead cost/Estimated maker hours= $360,000/48,000 hours= $7.5 per machine hour

Finishing department:

estimated manufacturing overhead cost/Estimated direct labor cost= $486,000/$270,000= $1.8 every dollar of straight labor

In finishing department, the company would use $1.80 of production overhead because that each dissension of straight labor expense incurrent through the department. To state it another way, we can say the the production overhead would be used