What formula represents the overhead rate?

The formula for the overhead rate is represented by estimating manufacturing overhead (MOH) divided by estimated activity levels, often measured in hours. This calculation is essential for determining how much overhead costs can be allocated to a specific unit of product or service produced.

In managerial accounting, particularly in cost accounting, businesses need to allocate overhead costs to their products to accurately determine the total cost of production. By using estimated numbers, the company can create a budget and plan for the production process without waiting for actual costs to be incurred.

Estimating allows for consistency and aids in pricing and financial decision-making before the completion of the work. Once actual production occurs, these estimates can be adjusted or compared to assess the efficiency and accuracy of overhead cost allocations. Thus, estimating MOH divided by estimated hours provides a proactive and standardized method for budget planning and cost control.