Posted in Finance, Accounting and Economics Terms, Total Reads: 2125
Definition: Pre-Determined Cost
Pre-determined cost is the cost specification which is prepared even before commencement of an operation. Such a determination is done either from past data or as per in-place organisational standards. Usually, the estimate is also updated as per all ambient factors that affect cost. The most significant application of pre-determined cost is in periodic budget formulation and review in an organisation.
The most mention-worthy pre-determined cost for an organisation (especially for manufacturing companies) is the pre-determined overhead cost or pre-determined overhead rate (POHR). Before start of every financial year, it is imperative for the organisation to have determined this cost, the reason being the typical nature of overhead cost. Other costs like direct operating costs (unit-wise), wages (monthly or daily), managers’ salary (monthly) can be associated with smaller periods, but overhead costs involving running of the plant is a year-round activity. So it has to be pre-determined for correct budget allocation. The following formula is used to determine pre-determined overhead cost: