Question

Predetermined OH rate

Discuss the predetermined OH rate and how it is computed. Please provide an example of how to compute.

Answer 1

Predetermined OH rate is a rate determined by the company to apply the overhead cost on product. In a traditional method, overhead rate is determined based on Direct Labor Hours.
For example;
Total overhead cost for the year	$480,000
Budgeted Direct Labor Hours ( DLH)	8000 hours
Predetermined OH rate ( $ 480,000/ 8,000 hours)	$          60.00	per DLH
Ovehed cost for each product can apply based on number of hours required for each unit.
suppose, Direct Labor Hour per unit is 4 hours then the overhead cost per unit = 4 hours x $ 60 per hour = $ 240