A predetermined overhead rate is a rate that is used to allocate overhead costs to products or services. It is calculated by dividing the total estimated overhead costs for a period by the total estimated activity base for that period. The activity base is typically a measure of the level of activity that will cause the overhead costs to be incurred. For example, if a company expects to incur $100,000 in overhead costs and produce 10,000 units of product, the predetermined overhead rate would be $10 per unit.
Predetermined overhead rates are used to apply overhead costs to products or services in a consistent and predictable manner. This can help to ensure that the costs of production are accurately reflected in the prices of the products or services. Predetermined overhead rates can also be used to make budgeting and planning decisions.
