The predetermined overhead rate is a rate that based on the relationship between estimated annual overhead costs and expected annual operating activity. This relationship is expressed in terms of a common activity base. The activity may be stated in terms of direct labor costs, direct labor hours, machine hours, or any other measure that will provide an equitable basis for applying overhead costs to jobs. The predetermined overhead rate is established at the beginning of the year.
Estimated Annual Overhead Costs ÷ Expected Annual Operating Activity = Predetermined Overhead Rate