Predetermined Overhead Rate Calculator

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total allocation base (usually direct labor hours or machine hours) for the period. It's calculated in advance (at the start of a period) using estimates, then applied to actual jobs as they're completed.

Indirect costs of production that can't be traced directly to a specific unit — factory rent and utilities, equipment depreciation, indirect labor (supervisors, maintenance staff), and factory supplies. It excludes direct materials and direct labor, which are traced to specific jobs directly.

Actual overhead costs and production volume aren't known until the end of a period, but businesses need to price jobs and value inventory throughout the period — a predetermined rate lets them apply overhead to each job as it's completed, then reconcile any difference (over- or under-applied overhead) at period-end.

Direct labor hours and machine hours are the most common, though direct labor cost and units produced are also used — the best choice is whichever allocation base most closely drives your actual overhead costs (e.g. machine hours for a highly automated factory, labor hours for a labor-intensive one).

Applied overhead = your predetermined rate × the ACTUAL amount of the allocation base used during the period (not the estimate). Once the period ends and you know your actual overhead cost, the variance = actual overhead − applied overhead — a positive variance means overhead was underapplied (you applied less than actual cost), negative means it was overapplied.