 https://www.bookstime.com/ing the percentage conversion, we see Bob’s total overhead costs with regard to sales are 25%. Following are some of the disadvantages of using a predetermined overhead rate. Following are some of the advantages of using a predetermined overhead rate. The drawbacks linked with a predetermined overhead rate are stated below. The overhead rate for the packaging department is \$2.20 per dollar of direct labor. One such metric that you may have heard of is predetermined overhead rate. Since the amount of actual overhead is more than the forecasted overhead, the manufacturer has over-absorbed its overhead costs. Had the manufacturer’s overhead costs totaled less than the estimated costs, the manufacturer would have under-absorbed its overhead costs. Therefore, the predetermined overhead rate is \$2 per direct labor hour.

## Overview Of Predetermined Overhead Rate

Again, that means this business will incur \$8 of overhead costs for every hour of activity. That means this business will incur \$10 of overhead costs for every hour of activity. The predetermined overhead rate calculation shown in the example above is known as the single predetermined overhead rate or plant-wide overhead rate. This example helps to illustrate the predetermined overhead rate calculation. A pre-predetermined overhead rated overhead rate is the rate used to apply manufacturing overhead to work-in-process inventory. The pre-determined overhead rate is calculated before the period begins. The first step is to estimate the amount of the activity base that will be required to support operations in the upcoming period. The second step is to estimate the total manufacturing cost at that level of activity. The third step is to compute the predetermined overhead rate by dividing the estimated total manufacturing overhead costs by the estimated total amount of cost driver or activity base. Common activity bases used in the calculation include direct labor costs, direct labor hours, or machine hours.

## Direct Labor Hours

Since we need to calculate the predetermined rate, direct costs are ignored. This means that for every hour of machine work, the company can expect to incur \$5.60 in overhead costs. Hence, this predetermined overhead rate of 66.47 shall be applied to the pricing of the new product VXM.

### How do you apply overhead cost per job using a predetermined overhead rate?

1. Total Job Cost = Direct Materials + Direct Labor + Applied Overhead.