Question

Please provide discussions on variable pre-determined overhead make sure you include the formula in the parametric form/formula and explain all involved variables.

Please answer in more than 350 words and in word format only.

Answer 1

Variable predetermined overhead –

Every business has overhead costs. These are the expenses that apply to running the business and don't contribute directly to producing goods or offering services for sale.

Costs such as materials and direct labor aren't part of overhead, but office supply costs and administrative salaries are.

Overhead costs come in two different forms: fixed and variable. The overhead rate is the cost, divided by the number of items produced or units of service sold.

Fixed overhead costs are the same regardless of how productive the business is.

Variable rates refer to costs that rise as productivity rises.

For example, a small business that prints books will need to buy more paper and run its printers for longer hours. The paper and electricity are both variable costs, but the paper is not part of overhead, while the electricity is a variable overhead cost.

To estimate its upcoming costs, a small-business owner or accounting manager will produce a list of predetermined variable overhead rates. This list shows the expected cost of running the business given various levels of production.

Since variable overhead rates contribute to higher costs when production is high, a higher volume of sales doesn't translate into a direct rise in profits. Predetermined variable overhead rates are based on price quotes, projections and recent energy rates that are likely to impact expenses.

Predetermined overhead rate is used to apply manufacturing overhead to products or job orders and is usually computed at the beginning of each period by dividing the estimated manufacturing overhead cost by an allocation base.

Commonly used allocation bases are direct labor hours, direct labor dollars, machine hours, and direct materials.

Formula:

The formula of predetermined overhead rate is written as follows:

Predetermined Overhead rate = Estimated manufacturing overhead cost / Estimated total units in the allocation base