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Applied Predetermined Overhead Rate - How to Compute total Production Costs using Estimated Labor & Machine Hours

Applied predetermined overhead rate is a cost accounting method that applies estimated labour or machine cost per hour to total # of actual hours in a given period, to derive the total cost of production, whether it is machine use or physical labour hours. This method is commonly used to apply factory overhead to a given job or product. The formula for applied predetermined overhead rate is:

 Applied Overhead Rate = Budgeted annual overhead / Budgeted annual activity hours*

* Budgeted annual activity hours include direct labour & machine hours.

Example

Assume a factory calculates its predetermined overhead rate based on machine use or hours. Budgeted overhead is estimated at \$600,000 while budgeted machine hours are estimated at 150,000. The applied overhead rate is calculated as:

 Applied Overhead Rate = Budgeted annual overhead / budgeted annual activity hours Applied Overhead Rate = \$600,000 / 150,000 hours Applied Overhead Rate = \$4 per machine hour

During the course of the year, actual machine hours used to output the same amount of products is 145,000 hours. Thus, what is the actual overhead?