Resources ❯ Accounting Terms

Predetermined Overhead Rate

[pree-di-TUR-mind OH-vur-hed rate]

What is the definition of Predetermined Overhead Rate?

A rate calculated before the beginning of an accounting period that is used to estimate and allocate overhead costs to products or jobs based on expected conditions and cost drivers.

Using Predetermined Overhead Rate in an Example

In a manufacturing company, the predetermined overhead rate might be calculated based on the expected machine hours. For example, if the estimated overhead costs are $100,000 and the expected machine hours are 50,000 hours, the predetermined overhead rate would be $2 per machine hour. This rate is then used to apply overhead costs to products as they are manufactured based on the actual machine hours used.

Using Predetermined Overhead Rate in a sentence

Our management uses the predetermined overhead rate to budget the production costs and set pricing strategies effectively.

Related Terms

P/E Ratio

The P/E Ratio, or Price-to-Earnings Ratio, is a financial metric used to evaluate the relative value of a company's shares. It is calculated by dividing the market price per share by the earnings per share (EPS). This ratio indicates how much investors are willing to pay per dollar of earnings, providing insight into investor confidence and stock valuation.

PCAOB

The Public Company Accounting Oversight Board (PCAOB) is a private-sector, nonprofit corporation established by the Sarbanes-Oxley Act of 2002. It oversees the auditors of public companies to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports.

PFS

A certification for Certified Public Accountants who specialize in personal financial planning, which includes fulfilling requirements in education, experience, ethics, and an examination.

POB

The POB, or Public Oversight Board, is an independent oversight entity composed of public members that monitors and evaluates peer reviews and other activities conducted by the SEC Practice Section (SECPS) of the AICPA's Division for CPA Firms.

Paid in Capital

The portion of stockholders' equity that comes from the capital contributed by investors through the purchase of stock at issuance, excluding any capital generated from earnings or donations.

Par

Equal to the nominal or face value of a security, such as a bond or stock. A security selling at par is traded at an amount equivalent to its original issue value or its redemption value at maturity, typically represented as $1000 per bond.

Par Value

The nominal or face value assigned to a share of stock as specified in the articles of incorporation of a corporation. This value is used for legal purposes and represents the minimum price at which shares can be issued, serving as a cushion of equity capital for the protection of creditors.

Parent Company

A company that has a controlling interest in one or more other companies, usually by owning a majority of their common stock, thereby exerting control over their operations and decisions.

Partnership

A partnership is a business structure involving two or more individuals who agree to carry on a trade or business together, sharing in profits and liabilities. Partnerships can vary in terms of liability exposure, with general partners typically having unlimited liability, while limited partners may have liability only up to the amount they invest.

Passive Activity Loss

A financial loss generated from business activities in which the taxpayer does not materially participate, often used in the context of rental properties or other business investments where the investor is not actively involved.

Passive Income

Income derived from investments such as dividends, interest, royalties, rents, and income from personal service contracts, as well as distributions from estates or trusts, where the recipient is not actively involved in the generation of this income.

Patronage Dividends

Patronage dividends are amounts paid by a cooperative to its members or customers, reflecting the proportion of the cooperative's profit earned or business conducted by each member during a tax year.

Payback Period

In capital budgeting, the payback period is the length of time required to recover the cost of an investment. It calculates the time needed for the cash inflows from a capital investment project to equal the cash outflows.

Payback Period Method

A capital budgeting technique that determines the time required to recoup the initial investment in a project, calculated by dividing the initial investment by the annual cash inflow.

Payout Ratio

The percentage of a firm's earnings distributed to shareholders in the form of dividends.

Peer Review

A process in which the practices of an accounting firm are evaluated for compliance with professional standards, typically conducted by independent reviewers from the same profession.

Penalty

A financial or legal sanction imposed by a government agency or regulatory authority on a taxpayer for failing to comply with legal requirements, such as not performing a specific act or omitting vital information on a tax return.

Pension

A retirement plan offered by an employer that provides financial benefits to employees upon retirement. The plan is managed through a trustee who controls the plan's assets.

Period

An interval of time with a specified length or characterized by certain conditions.

Periodic Inventory System

A method of inventory valuation for financial reporting purposes where a physical count of the inventory is performed at predetermined intervals, such as at the end of each fiscal year, to determine the quantity on hand.

Periodicity

Periodicity in accounting refers to the recognition that net income for any period less than the life of the business, although tentative, is still a useful estimate of net income for that period.

Perpetual Inventory

A system that maintains a continuous, real-time record of all inventory items, tracking each receipt and withdrawal to ensure accurate and current inventory data.

Personal Financial Planning

The process of creating a strategy to address an individual's personal, business, and financial goals and concerns, typically involving budgeting, investment management, tax planning, and retirement planning.

Personal Financial Specialist (PFS)

A certified public accountant who specializes in personal financial planning and meets specific requirements including education, experience, ethics, and an examination.

Personal Financial Statements

Financial statements prepared for an individual or family to show their current financial status, detailing assets, liabilities, income, and expenses.

Personal Property

Personal property refers to movable assets that are not permanently attached to or part of real estate. This includes both tangible items such as vehicles, furniture, and electronics, and intangible items such as stocks, bonds, patents, and copyrights.

Petty Cash

A small amount of cash that a company keeps on hand to pay for minor, everyday expenses in an office.

Phantom Income

Income reported for tax purposes but for which no actual cash or tangible financial benefit is received by the taxpayer.

Physical Inventory

An actual count of all merchandise on hand at the end of an accounting period, conducted to verify stock records and account balances.

Plant

In accounting, a plant refers to the fixed assets of a business, including land, buildings, machinery, and all equipment permanently employed for production or operational purposes.

Pledged

An asset that is placed in trust and used as collateral to secure a debt obligation.

Pooling of Interest

An accounting method used to account for mergers or acquisitions where the acquiring company issues its common stock in exchange for the common stock of the acquired company, under specific criteria that allow the combined financial statements to be presented as if the companies had always been a single entity.

Portfolio

A collection of various investments held by an individual or institutional investor, including stocks, bonds, commodities, real estate investments, cash equivalents, or other assets.

Post-Closing Trial Balance

A trial balance prepared at the end of an accounting period after all adjusting and closing entries have been posted, serving as a final verification of the balance of the ledger.

Post-Retirement Benefits

Benefits such as pensions, health care, life insurance, and other supports that an employer provides to retirees, their dependents, or survivors.

Preemptive Right

A right granted to existing shareholders to purchase additional shares of a new issue of stock before it is offered to the general public, allowing them to maintain their proportional ownership in the company.

Preferred Stock

A type of capital stock that carries certain preferences over common stock, including priority in dividend payments and claims on assets in the event of liquidation.

Premium

In finance, a premium refers to the amount by which the price of a security, such as a bond, option, or futures contract, exceeds its intrinsic or face value. In insurance, it is the cost paid for coverage over a specified period.

Premium Bond

A bond that is sold for more than its face or redemption value.

Prenuptial Contract

An agreement between a future husband and wife that details how the couple’s financial affairs are to be handled both during the marriage and in the event of divorce.

Prepaid Expense

Costs incurred for goods or services that are expected to provide economic benefits within the future operating cycle, recorded as assets on the balance sheet until they are consumed or used.

Present Value

The current value of a future cash flow stream, discounted at a specific rate to account for the time value of money.

Preventive Controls

Controls implemented to avert errors or fraudulent activities that could lead to inaccuracies in the financial statements.

Price Range

The high and low prices at which a stock or other financial instrument has traded over a specific period of time.

Price/Earnings (P/E) Ratio

A financial metric used to evaluate the relative valuation of a company, calculated by dividing the current market price per share by the earnings per share (EPS). This ratio indicates how much investors are willing to pay per dollar of earnings, providing insight into investor confidence and stock profitability.

Primary Earnings Per Share

The ratio of earnings available to common stockholders divided by the number of common shares outstanding.

Prime Rate

The interest rate charged by major U.S. banks on loans made to their most creditworthy customers, often used as a benchmark in lending.

Principal

The original sum of money borrowed in a loan, or the amount of the investment, exclusive of any interest or dividends. It also refers to the party whose interests are represented by an agent in a principal-agent relationship.

Private Placement

A method of raising capital through the sale of securities to a relatively small number of select investors as part of an offering that is not made to the general public and is exempt from the typical registration requirements of regulatory authorities.

Privilege

A right or immunity granted as a peculiar benefit or advantage, often specific to a particular person or group.

Privity

A legal doctrine that determines the parties who have the right to enforce a contract or be sued for its breach, based on their direct involvement and interest in the contract.

Pro Forma

A presentation of financial information that anticipates the impact of an expected or hypothetical event such as a merger, acquisition, or change in capital structure.

Pro Rata

Distribution of an expense, fund, or dividend in proportion to ownership or entitlement.

Product Line

A group of related products manufactured by a company, each serving a similar market sector or fulfilling a particular type of customer need.

Production

The act or process of creating goods or services, which can include a defined portion of the proceeds of production up to a dollar amount in the context of project financing.

Profit

Profit is the financial gain realized when the revenue generated from business activities exceeds the expenses, costs, and taxes involved in sustaining the activity.

Profit Margin

A financial metric used to assess the profitability of a business, calculated as the percentage of revenue that exceeds the costs of goods sold and results in net income.

Profit Margin Pricing

A pricing strategy in which the price of a product is set based on a predetermined profit margin added to the total costs and expenses incurred in producing the product.

Profit Sharing Plan

A defined contribution plan where a portion of an entity's profits is allocated to individual participant accounts, typically benefiting employees by allowing them to share in the company's profitability.

Profitability

The ability of a business or investment to generate a sufficient income or return to attract and maintain capital investment.

Projection

Prospective financial statements that forecast the future performance of a company, country, or other entity, using one or more hypothetical assumptions and based on historical and current information.

Promissory Note

A written, legally binding document in which one party promises to pay a specific amount of money to another party under specified conditions, including a set interest rate and maturity date. The note may be secured by collateral or unsecured.

Property, Plant, and Equipment

Long-term tangible assets that are used in the continuing operation of a business and are expected to provide benefits for more than one year.

Proprietorship

An unincorporated business owned and operated by a single individual, who has complete liability for all assets and rights to all profits, without the limited liability protection of a corporation or a limited liability company (LLC).

Prospective Financial Information (Forecast and Projection)

Prospective Financial Information includes financial forecasts and projections, which present an entity's expected financial position, results of operations, and changes in financial position based on assumptions about future events. A financial forecast is based on the responsible party's assumptions reflecting expected conditions and planned actions. A financial projection, however, is based on hypothetical assumptions, showing potential financial outcomes under different scenarios.

Prospectus

A formal written document that is part of the registration statement filed with the Securities and Exchange Commission (SEC) for public offerings. It describes the securities or partnership interests to be issued and sold, detailing the business plan, fund objectives, risks, and other essential information necessary for investors to make informed decisions.

Proxy

A proxy is an authorization, either written or electronic, that allows someone other than the shareholder to vote on the shareholder's behalf, often delegating the voting rights to management or a designated representative.

Public Company Accounting Oversight Board (PCAOB)

A private-sector, non-profit corporation established by the Sarbanes-Oxley Act of 2002, tasked with overseeing the auditors of public companies to protect the interests of investors and ensure the public interest in the preparation of informative, fair, and independent audit reports.

Public Offering

The process of offering shares of a private corporation to the public in a new stock issuance, typically through filings with the Securities and Exchange Commission (SEC).

Public Oversight Board (POB)

The Public Oversight Board (POB) is an independent entity composed of public members that oversees and evaluates peer reviews and other regulatory activities conducted by the SEC Practice Section (SECPS) of the AICPA's Division for CPA Firms.

Purchase Method of Accounting

An accounting approach for a merger where the assets of the acquired company are added to the acquiring company's balance sheet at the price paid for them, reflecting the total cost of acquisition.

Purchase Order

A written authorization issued by a buyer to a vendor, requesting the delivery of specified goods or services at a stipulated price.

Purchases

In accounting, particularly under the periodic inventory system, 'purchases' refers to the total cost of all merchandise acquired for resale during a specific accounting period. This account is used to track the expenses related to acquiring inventory that will later be sold.

Purchases Discounts

Discounts taken by a buyer from a supplier as an incentive for early payment of their invoice, typically related to merchandise purchased for resale.

Purchases Returns and Allowances

A contra account used under the periodic inventory system that records cash refunds, credits on account, and allowances granted by suppliers for returned, unsatisfactory, or incorrect merchandise originally purchased for resale.

Push-Down Accounting

An accounting method where the financial values resulting from an acquisition are transferred or 'pushed down' to the accounts of the acquired company, reflecting the new basis established in the acquisition.

Puts

A put is a type of option contract that gives the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a predetermined price within a specified time frame.

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