 In this presentation, we'll take a look at the calculation of the predetermined overhead rate and then use that predetermined overhead rate to allocate the overhead to the processing departments. Last time we went over the process of overhead and what items could be included in overhead to calculate actual overhead. Let's do a quick recap before we get into the rate of overhead. Support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. The items that we need to consider when considering the overhead process will be that we need to set a predetermined overhead rate and usually we do that based on the prior period. So we're going to take the prior period information, we'll set up the predetermined overhead rate. We're going to do that after we go through the actual overhead or what would be included in overhead to give us an idea of how that might be done. And then we're going to record the actual overhead during the period and that's what we did in the prior presentation. We looked at those items that might be included in actual overhead. We want to apply the estimated overhead to the processes. So we're going to take the estimated overhead and apply it out to our processes involved the production department. And then we're going to have the adjusted for the over or under applied overhead. In other words, we still might have a difference between the actual and estimated overhead and we'll have to apply that out. Here we're going to be concentrating on setting up the predetermined overhead rate and using it to apply out the overhead to the proper process, the proper department. So just recall from prior presentations, the kind of things that would be included in overhead. We had factory depreciation that was increasing the overhead things like anything that's on the factory that we can't apply to the process. We had the utilities on the factory, for example, increasing the factory overhead. We had indirect materials, which was increasing the factory overhead. We had indirect labor, which we increased the factory overhead. So notice the factory overhead can be comprised of many different things. When we think about estimating what the factory overhead predetermined rate should be, we're going to have the predetermined overhead rate. We're going to base it usually on the prior period. So we're going to consider the prior period and use the prior period number and possibly make adjustments to them to account for what we think might happen in the current period. And then we're going to make a predetermined overhead rate based on that. That will typically consist of an estimated overhead cost, again, possibly from the prior time period that we would then adjust for. We're going to look at project out into the future, take the prior number last month, project out into the future of what kind of changes might be in the following months, and come up with the estimated overhead cost. What we think the overhead cost will be at the end of the current time period. And then we're going to take that and divide it by an estimated activity base. Now, the activity base is going to be some type of thing that we're going to use to determine which process we're going to put something into. And notice with our departments, we said Department A was where we make the K&E possibly. Department B is a packaging department. We might consider in that case, Department A to have more of the weight to it, meaning much more might be done there than in Department B. And therefore you would think that we would want to allocate more costs to that department. So we might then want to determine something that would apply out more of the costs to an appropriate fashion, in an appropriate fashion. We're trying to look for something an activity base that could be used to apply out the costs most efficiently. Now, a lot of times in book problems, we might use like machine hours, or we might use labor hours as some type of driving factor, because you would think that if we're in a process that has more labor hours, then it would be the labor hours relatively larger the process. And therefore we can use kind of like a ratio to apply more out based on that activity base. Now, we could use labor as a typical one to use. If we're using some type of process, however, that doesn't have a lot of labor, because it's a process that if it's all automated, then we might use something like machine hours or something like that might be a more appropriate for us to determine how big one process is versus another and therefore how much of the overhead to apply to one process versus another. Notice what we're not doing here. We're not just taking all those two processes. Let's just divide it by two. We could do that, but it might not be the most appropriate way to do it because they might be processes that are not equal in value. And therefore we would use some type of activity base to apply out the overhead properly to the two items. So we're going to say that our predetermined overhead is 1.6. We're going to say the calculation here is 1.6. How do we get that? Well, we said that the estimated overhead costs from the prior period divided by our activity base, which we're going to say is direct labor in our case. So we're going to divide those out, get our predetermined overhead rate of 1.6. And then if we use that, and then we can look at our work in process department A has 400,000 direct labor and work in process department B has 185 direct labor because we can determine the direct labor and we know what that number is. And we're going to use that number then to apply out the overhead between department A and department B. So that would mean that department A is going to have 640 because we're going to take then our 400,000 times 1.6 and that's going to be 640 and then department B is going to be 185,000 times 1.6 and that's going to be the 296,000. And then we're going to take out of then adding those two up 640,000 plus 296,000. The 936,000 is what's going to come out of the factory overhead. So we're going to be this is going to be our starting point. Then we had the factory overhead at the 936,000. We pulled money out of the factory overhead, which in this case happened to be perfect. It happened to work out perfectly. And we took 640 applied department A and 296 to department B applied those out. This is our beginning number. This is our ending number. Factory overhead goes down to zero and these two items are applied out. Now in this case, it happened to work out perfectly and that we were the factory overhead went down exactly to zero as we applied this out because it's an estimate. It may not be the case where that always happens and we may have an estimated number and we may not apply this out perfectly at the end of the time period. If that happens, if it doesn't get applied out perfectly, then we'll have a remaining balance in the factory overhead account that we'll have to then account for. We'll have to then clear out in some way, shape or form. So again, the calculation, what we would have here is we have the predetermined overhead rate. We have the estimated overhead costs, typically from the prior period, estimated overhead costs. In this case, it was the same, right? Our estimated overhead costs were 936. And then we're going to divide it by the estimated activity base, which in our case was the 400,000 plus to 185. 1000 of the direct labor. And then we took that and divided it, divided it out, we get that 1.6. We're going to use that 1.6 then by determining what the direct labor per department is, something that would be given within the problem, something that would be given and something that we would have access to. And we're going to take those numbers and multiply it times the 1.6, which is the predetermined activity rate to get our application or allocation of this 936 applied out to department A and department B. In this case, again, it works out perfectly to take this down to zero exactly. If that doesn't happen, if this doesn't go down to zero exactly, then you're going to have an over or under applied amount that we'll then adjust for by adjusting it out typically to cost of good sold so that we can then start this process over again.