Actual Overhead Rate and Pre-Determined Overhead Rate

Written by True Tamplin, BSc, CEPF®

Reviewed by Editorial Team

Updated on March 02, 2023

Overhead rates that are established for the absorption of overheads may be divided into two parts:

  • Actual Overhead Rate

1. Actual Overhead Rate

The actual overhead rate is based on the actual amount of overhead to be absorbed and the actual quantum or value of the base selected (e.g., direct wages, cost of materials, machine hours, direct labor hours, etc.).

The actual overhead rate enables the recovery of the actual amount of overhead.

However, its main drawback is that it is historical in nature; it can only be ascertained 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.

2. Predetermined Overhead Rate

The predetermined 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.

It is applied for the absorption of overheads during the period for which they have been computed.

Actual Overhead Rate and Pre-Determined Overhead Rate FAQs

About the Author

True Tamplin, BSc, CEPF®

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

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, 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, or check out his speaker profile on the CFA Institute website.

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