Plantwide Predetermined Overhead Rate Calculator
This calculator adopts a holistic approach by applying a single overhead rate to all operations throughout the plant, regardless of the department. The benefits are multifold:
- Simplification of Calculations: It reduces the complexity involved in the allocation process.
- Enhanced Budget Accuracy: By standardizing the overhead rate, companies can better predict financial requirements.
- Time Efficiency: It decreases the labor-intensive nature of job-by-job overhead calculation.
Formula
The predetermined overhead rate is calculated using the formula:
Predetermined Overhead Rate = (Total Fixed Overhead Cost + Total Variable Overhead Cost at Target Activity Level) / Estimated Allocation Base
- Total Fixed Overhead Cost: These include expenses such as rent and administrative salaries that are constant regardless of the plant’s output.
- Total Variable Overhead Cost at Target Activity Level: These expenses vary with production volume and include items like utilities and indirect materials.
- Estimated Allocation Base: This could be Direct Labor Hours, Machine Hours, or any other relevant metric.
Table for General Terms
| Term | Definition |
|---|---|
| Direct Labor Hours | Hours worked by employees directly involved in production. |
| Machine Hours | Total operational hours of machinery. |
| Direct Labor Cost | Costs associated with employee wages directly involved in production. |
| Units Produced | Total output of manufactured products. |
Example
Let’s apply the calculator to a practical scenario:
- Fixed Costs: $120,000
- Variable Costs at Target: $80,000
- Allocation Base (DLH): 25,000 hours
Calculated Rate:
Overhead Rate = (120,000 + 80,000) / 25,000 = 8 per Direct Labor Hour
Most Common FAQs
Using a plantwide rate simplifies the accounting process, making it easier and less time-consuming.
It should be recalculated annually or upon significant operational changes to ensure accuracy.
Yes, significant fluctuations in production or overhead costs can lead to substantial rate changes.
