ECONOMICS

Detailed explanation-1: -The predetermined overhead rate is set at the beginning of the year and is calculated as the estimated (budgeted) overhead costs for the year divided by the estimated (budgeted) level of activity for the year. This activity base is often direct labor hours, direct labor costs, or machine hours.

Detailed explanation-2: -If the volume of goods produced varies from month to month, the actual rate varies from month to month, even though the total cost is constant from month to month. The predetermined rate, on the other hand, is constant from month to month. Predetermined rates make it possible for companies to estimate job costs sooner.

Detailed explanation-3: -What is a Predetermined Overhead Rate? A predetermined overhead rate is an allocation rate that is used to apply the estimated cost of manufacturing overhead to cost objects for a specific reporting period.

Detailed explanation-4: -Predetermined rate means an indirect cost rate, applicable to a specified current or future period, usually the governmental unit’s fiscal year. This rate is based on an estimate of the costs to be incurred during the period. Except under very unusual circumstances, a predetermined rate is not subject to adjustment.