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The fixed overhead cost estimated at the start of the accounting period divided by the number of units a firm anticipates producing during the accounting period ($50,600 10,000 units = $5.06 per unit) is the predefined overhead rate.
What is an overhead rate?
A company's overhead rate is its cost of just remaining in business, not of delivering a good or service, divided by some other metric (or allocation measure). All costs shown on the company's revenue statement that aren't directly related to producing a good or service are included in the overhead of the company.
The overhead rate is the proportion of a company's overhead, like as its rent and other administrative expenditures, to its direct costs, sales, or other inputs, such the number of hours a machine works. It gives business owners and managers a comparison of indirect expenses to, say, their direct production costs or total sales.
You begin by tallying up all of your company's indirect expenditures to get the overhead rate. These expenses, which include items like rent, utilities, office supplies, and pay for administrative employees, are not directly related to a particular activity or product line. With the right small company accounting software, you can complete all of these tasks quite quickly, but you should be aware of how the system works before attempting them on your own.
After adding up all indirect expenses, a measure of allocation is used to split the total. The entire revenues of the firm, the costs that are specifically attributable to certain activities or product lines, or any other metric may be used to calculate this.
- Allocation factor x indirect expenses = overhead rate.
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The predetermined overhead rate is
a.equal to the amount of fixed cost estimated at the end of the accounting period divided by the actual number of units produced.
b.equal to the amount of fixed cost estimated at the beginning of the accounting period divided by the number of units a company estimates it will produce at the beginning of the accounting period.
c.equal to the amount of fixed cost estimated at the end of the accounting period divided by the number of units a company estimates it will produce at the beginning of the accounting period.
d.equal to the amount of fixed cost estimated at the beginning of the accounting period divided by the actual number of units produced.
