A predetermined overhead rate is based on estimates and is used for planning purposes only. It doesn’t reflect the actual overhead cost after the project or job is completed.
Machine hours Hours worked (direct labor hours) Number of employees (direct labor costs) Cost of materials (direct materials)[2] X Research source
For example, to calculate POR for next year, you need to estimate next year’s manufacturing cost so you can plug it into the POR formula. To estimate manufacturing costs, look at the last year’s. The cost of rent and utilities is fairly static from year to year. Then, pull salary info for your current employees, machine maintenance costs from last year, and so on, to create your estimate.
POR formula: Estimated manufacturing cost / Estimated direct labor hours $20,000 (manufacturing cost) / 4,000 (direct labor hours) = 5 The POR is $5. 00 per direct labor hour. This means that for every job order, the company can expect to incur $5 in overhead costs.
POR formula: Estimated manufacturing cost / Estimated machine hours $420,000 (manufacturing cost) / 75,000 (machine hours) = 5. 6 The POR is $5. 60 per machine hour. This means that for every hour of machine work, the company can expect to incur $5. 60 in overhead costs.
POR formula: Estimated manufacturing cost / Estimated direct materials cost $860,000 / $600,000 = 1. 43 The POR for the upcoming year is $1. 43. This means that for every manufactured unit, the company can expect to incur $1. 43 in overhead costs.
POR formula: Estimated manufacturing cost / Estimated direct labor cost 500,000 (manufacturing cost) / 200,000 = 2. 5 The POR is $2. 50. This means that for every product unit the company produces, they can expect to incur $2. 50 in overhead costs.
