Q. 12RQ - Horngren'S Financial And Managerial Accounting

Question

What is the predetermined overhead allocation rate?

Step-by-Step Solution

Answer

The predetermined overhead allocation rate is calculated by an organization before the reporting period begins to allocate the estimated overhead cost on per unit basis of the allocation base.

Step 1: Overhead expenses

Overhead expenses means the cost other than the direct material, labor or production cost. It is related to the general business expenses.

Step 2: Predetermined overhead allocation rate

$\mathbf{Predetermined}\mathbf{ }\mathbf{over}\mathbf{ }\mathbf{head}\mathbf{ }\mathbf{allocation}\mathbf{ }\mathbf{rate}\mathbf{=}\frac{\mathbf{Total}\mathbf{ }\mathbf{estimated}\mathbf{ }\mathbf{over}\mathbf{ }\mathbf{head}\mathbf{ }\mathbf{costs}}{\mathbf{Total}\mathbf{ }\mathbf{estimated}\mathbf{ }\mathbf{Labor}\mathbf{ }\mathbf{hours}\mathbf{ }\mathbf{of}\mathbf{ }\mathbf{the}\mathbf{ }\mathbf{over}\mathbf{ }\mathbf{head}\mathbf{ }\mathbf{allocation}\mathbf{ }\mathbf{base}}$

It is the allocation rate to allocate the total estimated overhead cost to each unit of the allocation base.