The pretetermined overhead rate is a predicted estimate of how much we think the job's overhead expenses will cost at the end of the job in this time period. Instead of waiting until the end of a job, businesses would rather estimate the cost up front and give a quote (based on this rate) on how much they think such and such will cost. Since overhead isn't easily traced back to the final product and changes with the level of production or even extreme weather, managers can be confused on how much overhead took place during the job, which is why we use a predetermined rate. 

                Decision makers calculate the predetermined rate by taking the estimated overhead cost and dividing that by the allocation base, which is the cost driver. A budgeted amount is used in the allocation base. The allocation base is used when predicting how much overhead is going to take place, based on certain cost drivers which will produce more overhead. Cost drivers can be machine hours, or how many hours the machines are running, labor hours,  how many hours people are working in the factory, these all will produce overhead (utilites expense, manager's salary expense).  

            We use the calculation of predictied manufacturing overhead for the upcoming time period (MOH), divided by the predicted cost driver (labor hours, machine hours) which will equal predicted overhead rate(POHR). This rate is then applied to the actual units or cost of the cost driver by mulitplication. We apply it becuase we want to know how much is actually taking place based on the quoted predetermined rate. So mulitply the POHR rate by the Actual Labor Hours or machine hours that took place. Then we record it in our jornal entries by debiting the Work in Process and Crediting the Manufacturing Overhead (MOH).

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