Predetermined overhead rate

Predetermined overhead rate is calculated by dividing budgeted manufacturing overhead by a budgeted activity base, such as machine-hours.

Also known asPOHR · overhead rate

ByHoang TruongUpdated June 30, 2026

FrameworkNormal costing

See it move

Loading infographic...

A division tree shows the predetermined overhead rate of €20 per machine-hour at the root, produced by dividing the left branch — budgeted overhead of €360,000 — by the right branch — budgeted machine-hours of 18,000. The tree conveys that the rate is set before the period begins, using planned rather than actual figures, so that overhead can be attached to each production job as work progresses throughout the year.

Where it fits

SubjectCost AccountingCoreTopicJob & Process CostingCoreTopicOverhead Allocation & ABCCore

The formula

LaTeX

POHR = \frac{OH_{budget}}{A_{budget}}

Variables

$P O H R$: Predetermined overhead rate (€ per activity unit)
$O H_{b} u d g e t$: Budgeted total manufacturing overhead for the period (€)
$A_{b} u d g e t$: Budgeted activity base for the period (e.g. machine-hours, direct labour-hours) (activity units)

Calculated before the period starts and applied to each job by multiplying the rate by actual activity consumed.

Check yourself

PracticeCORE

A manufacturer budgets €540,000 in manufacturing overhead and 18,000 direct labour-hours for the year. Job #77 uses 45 direct labour-hours. How much overhead is applied to Job #77?

Select an answer to check your understanding.