Actual Overhead Rate and Pre-Determined Overhead Rate

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on August 26, 2021

Overhead rates setup for the absorption of overhead may be divided into two parts: (1). Actual Overhead Rate, (2). Pre-Determined Overhead Rate.

Actual Overhead Rate

Actual overhead rate is that which is based on the actual amount of overhead to be absorbed and the actual quantum or value of the base selected such as direct wages, materials cost, machine hours, direct labour hours, etc. Actual overhead rate enables the recovery of the actual amount of overhead but its main drawback is that it is historical in nature which can be ascertained only after the overhead costs have been incurred and measured. As such the actual overhead rate is useless from the point of view of cost control.

Pre-Determined Overhead Rate

Pre-determined overhead rate is based on the anticipated amount of overhead and the anticipated quantum or value of the base. It is worked out by dividing the estimated amount of overhead by the estimated value of the base before actual production commences and is applied for the absorption of overhead during the period for which it has been computed.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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