Predetermined Overhead Fee (POHR) represents the allocation of estimated manufacturing overhead prices to services or products. It’s computed by dividing complete estimated overhead prices by the whole estimated exercise base. The exercise base, sometimes, is direct labor hours, direct labor value, or machine hours. For instance, if an organization estimates overhead prices to be $500,000 and anticipates 25,000 direct labor hours, the POHR could be $20 per direct labor hour ($500,000 / 25,000). This charge is then utilized to every services or products primarily based on the precise quantity of the exercise base used.
The calculation of this charge is essential for a number of causes. It gives a constant and systematic solution to assign oblique prices to merchandise, facilitating correct product costing. This accuracy is essential for pricing selections, profitability evaluation, and stock valuation. Traditionally, predetermined charges have been developed to handle the fluctuating nature of precise overhead prices and manufacturing volumes, offering a extra secure value allocation technique all through the accounting interval. Using POHR is important in making use of overhead prices to work-in-process stock and the completed items stock to make sure that monetary studies observe typically accepted accounting rules (GAAP) the place relevant.
