Overhead rates setup for the absorption of overhead may be divided into two parts: (1). Actual Overhead Rate, (2). Pre-determined Overhead Rate.
Actual Overhead Rate
Actual overhead rate is that which is based on the actual amount of overhead to be absorbed and the actual quantum or value of the base selected such as direct wages, materials cost, machine hours, direct labour hours, etc. Actual overhead rate enables the recovery of the actual amount of overhead but its main drawback is that it is historical in nature which can be ascertained only after the overhead costs have been incurred and measured. As such the actual overhead rate is useless from the point of view of cost control.
Pre-determined Overhead Rate
Pre-determined overhead rate is based on the anticipated amount of overhead and the anticipated quantum or value of the base. It is worked out by dividing the estimated amount of overhead by the estimated value of the base before actual production commences and is applied for the absorption of overhead during the period for which it has been computed.