Pre-determined overhead rate

The first step is to estimate the amount of the activity base that will be required to support operations in the upcoming period.

For example, the costs of heating and cooling a factory in Illinois will be highest in the winter and summer months and lowest in the spring and fall.

To avoid such fluctuations, actual overhead rates could be computed on an annual or less-frequent basis.

The use of such a rate enables an enterprise to determine the approximate total cost of each job when completed.

In recent years increased automation in manufacturing operations has resulted in a trend towards machine hours as the activity base in the calculation.