Overhead rate

Definition

The overhead rate is a calculation used to allocate indirect costs to products or job orders. It is determined by dividing estimated overhead costs by an allocation base such as direct labor hours or machine hours.

5 Must Know Facts For Your Next Test

1. 1. The predetermined overhead rate is calculated before the period begins using estimated data.
2. 2. Common allocation bases include direct labor hours, direct labor cost, and machine hours.
3. 3. Overhead applied to each job is found by multiplying the predetermined overhead rate by the actual amount of the allocation base incurred by the job.
4. 4. Differences between actual and applied overhead result in over-applied or under-applied overhead.
5. 5. The predetermined overhead rate helps in setting prices and controlling costs throughout the accounting period.

Review Questions

• 1. How do you calculate a predetermined overhead rate?
• 2. What are some common allocation bases used for determining an overhead rate?
• 3. What does it mean if there is over-applied or under-applied overhead at the end of an accounting period?

Related terms

Direct Labor Hours:

Total hours worked directly on specific jobs or products within a given period

Machine Hours:

Total hours machines are operated in production during a specified time frame

Indirect Costs:

Expenses that cannot be directly traced to a single product or job order, such as utilities and rent