Predetermined Overhead Rate
An estimated rate that assigns manufacturing overhead to production, calculated as estimated overhead divided by estimated activity in an allocation base.
Overhead cannot be traced to a job directly, and actual overhead is not known until the period ends, so companies set a rate in advance: estimated overhead for the period divided by the estimated activity in a base such as direct labor hours, machine hours or direct labor cost. Overhead applied to a job is the rate times the job’s actual use of the base.
Because the rate is built on estimates, applied overhead rarely equals actual overhead. The difference is over- or underapplied overhead and is closed at period end. In the UK the same idea is called an overhead absorption rate.
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