How is departmental predetermined overhead rate calculated?

A predetermined overhead rate is calculated by dividing the estimated overhead by the allocation base. Overhead is allocated to each product based on the estimated predetermined overhead rate and the number of units in the selected activity base.

What is a departmental overhead rate?

The departmental overhead rate is an expense rate calculated for each department in a factory production process. The departmental overhead rate is different at every stage of the production process when various departments perform selected steps to complete the final process.

What is the formula for departmental overhead rate?

When the manufacturer divided its total manufacturing overhead for the upcoming year by the total machine hours for the upcoming year, the result was a plant-wide overhead rate of $30. If Product A requires 7 hours in Dept #1 and 1 hour in Dept #2, it will be assigned overhead of $240 [(7+1)X$30].

Why departmental rates might be chosen over plantwide rates?

Departmental overhead rates are used by many manufacturers instead of using a single, plant-wide overhead rate. The reason for departmental overhead rates is that a manufacturer is likely to produce many diverse products which use different processes (each of which has different costs).

How to calculate predetermined overhead rate easily?

Predetermined Overhead Rate Example First, determine the manufacturing overhead cost. Calculate the total manufacturing overhead cost. Next, determine the units of allocation. Calculate the total units of allocation. Finally, calculate the POR. Calculate the predetermined overhead rate using the equation above.

How much is the predetermined overhead rate?

With the manufacturing overhead costs and the machine hour totals, you can calculate the predetermined overhead rate by dividing the overhead costs by the machine hours. For instance, if the manufacturer estimates $10,000 in overhead costs with 20,000 machine hours, the predetermined overhead rate is 50 cents per unit.

What is the advantage of using a predetermined overhead rate?

The primary advantage of a predetermined overhead rate is to smooth out seasonal variations in overhead costs. These variations are to a large extent caused by heating and cooling costs, which, while high in the summer and winter months, are relatively low in the spring and fall.

What is the formula for overhead rate?

The equation for the overhead rate is overhead (or indirect) costs divided by direct costs or whatever you’re measuring. Direct costs typically are direct labor, direct machine costs, or direct material costs—all expressed in dollar amounts.