Actual overhead costs aren’t known until a period closes — manufacturers instead set an overhead rate in advance, based on estimates, and apply it to production as the period unfolds.
How it works
Dividing estimated total overhead by an estimated activity base (commonly machine hours or direct labor hours) gives the predetermined rate; multiplying that rate by actual activity gives the overhead applied to production.
What this does not include
This does not include the underapplied or overapplied overhead adjustment made at period-end once true actual overhead costs are finally known and compared against what was applied throughout the period using the predetermined rate.
How to use this calculator
- Enter estimated overhead, estimated activity base, and actual activity.
Frequently asked questions
Why not just wait and use actual overhead costs directly?
Actual overhead costs (utilities, indirect labor, depreciation) aren’t known until the period ends, but businesses need to price and cost individual jobs or units throughout the period — a predetermined rate lets that happen in real time.
What’s commonly used as the activity base?
Machine hours, direct labor hours, or direct labor cost are all common choices, generally selected based on whichever most closely drives the actual overhead costs in a specific production environment.
What happens if actual activity comes in higher than estimated?
More overhead gets applied to production than originally estimated for the period, which is a normal, expected part of how the predetermined rate mechanically works.
