ECONOMICS

Detailed explanation-1: -A predetermined overhead rate is calculated at the start of the accounting period by dividing the estimated manufacturing overhead by the estimated activity base. The predetermined overhead rate is then applied to production to facilitate determining a standard cost for a product.

Detailed explanation-2: -You can calculate predetermined overhead rate by dividing the manufacturing overhead cost by the activity driver. For example, if the activity driver was machine-hours, then you would divide overhead costs by the estimated number of machine hours.

Detailed explanation-3: -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 overhead rates are calculated by dividing estimates of the coming year’s total factory overhead cost by an estimated usage or capacity of some unit of related activity (such as direct labor hours).

Detailed explanation-5: -Establishing a predetermined overhead rate for your business can give you a tool to help keep expenses in proportion with sales and production volumes. Monitoring a well-defined rate provides a quick signal that lets you know when it’s time to review spending and, in doing so, will help you protect your profit margins.