Predetermined Overhead Rate Meaning

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A predetermined overhead rate uses budgeted manufacturing overhead and budgeted allocation-base activity to assign overhead during a period. It is calculated before actual total costs are known.

Example

Budgeted overhead is 120,000 and budgeted machine hours are 30,000. The rate is 4 per machine hour; a job using 70 hours receives 280 of applied overhead.

Formula and assumptions

Predetermined overhead rate = budgeted overhead ÷ budgeted allocation-base activity

Remember the difference

Choose a base that reasonably reflects resource use. An estimated rate does not guarantee that total applied overhead will equal actual overhead for the period.

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Published 4 November 2026. Prepared with AI assistance; examples are fictional and simplified for learning.

Examples are simplified for learning. Where a term depends on US law, IFRS, US GAAP or a historical rule, check the context explained above and the requirements relevant to your course.

Study references: OpenStax financial accounting and managerial accounting. For reporting requirements, consult the applicable IFRS Standards or FASB guidance. US tax terms should be checked against the relevant tax-year IRS instructions.

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