Calculating predetermined overhead rates is useful for businesses in a number of ways. The immediate benefit is to assist with pricing, and to understand the margin on each product and sale. Predetermined overhead rates are calculated estimations that factor the overhead into to total manufacturing cost-per-unit, for a specific period of time. Quarterly rates are common, but annual estimates are also used.

Overhead Factors

Utility bills, raw materials, labor, employees, equipment and everything that factors into the production of a product will enter the predetermined overhead rate calculation. Historic overhead rates are useful for analyzing consistent expenses and expenses that spike seasonally. The rate is based on the amount of expected production. After weighing the total costs for the period against the resulting supply, the predetermined rate is reached on a per-unit basis.

Pricing Benefits

Knowing the estimated cost-per-unit after production is a powerful tool for businesses. Having the figure estimated in advance makes pricing strategy much easier. A business can analyze competitor pricing, and can base a strategy on that business' production costs to maintain profitable margins, while maximizing market potential.

Overhead Variability

Predetermined overhead rates are not static, and businesses can adjust the rate, based on unforeseen overhead fluctuations. The flexibility in this model allows for responsiveness to major changes in the overhead structure. Using a predetermined rate on short, time-period cycles, makes fluctuation adjustments an easy accounting process.

Business Management

Any process that forces a business to analyze overhead and to note areas for improvement can have a positive effect on profitability. Locate weak spots and areas in which overhead stands to decrease, through the creation of efficiencies, that will reduce the production cost and will increase profit margins. Savings on utilities, operational costs and sourcing raw materials, all factor into the equation. Knowing the per-unit cost through a predetermined overhead rate also puts a hard number on paper for investors, lenders and accountants, who are looking to numbers for credibility and forecasting procedures. It can help scale a business, by accounting for new employee costs through visible return on each worker's production capabilities.

End-of-Period Reporting

After the period for a predetermined overhead rate ends, the business is left with a credit on the ledger or a debit to pay, which will ultimately have an impact on quarterly and annual profit figures. When calculated correctly, the debit or credit will be minor, and it makes the process for accounting simple.