Accumulation of overhead data, making primary distribution, secondary distribution and absorption are possible only at periodic intervals. Generally this is done at the end of every month. So overheads are absorbed by products at predetermined rate.
Predetermined rate is given by:
Let suppose, budgeted overhead is $ 10 lac and budgeted machine hours are taken at 100,000. So predetermined rate is $ 10 per machine hours. If product X consumes 10 machine hours per unit it will be charged $ 100 per unit.
There can be single recovery rate or multiple recovery rates. Use of multiple recovery rates results in more logical cost analysis.
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