at the beginning of the year, a company estimates total direct materials costs of $2,000,000 and total overhead costs of $3,000,000. if the company uses direct materials costs as its activity base to apply overhead, what is the predetermined overhead rate it should use during the year?

Question

10-11-2022
Business

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at the beginning of the year, a company estimates total direct materials costs of $2,000,000 and total overhead costs of $3,000,000. if the company uses direct materials costs as its activity base to apply overhead, what is the predetermined overhead rate it should use during the year?

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contexto1028 contexto1028 · Answer 1 · 2022-11-16T06:56:10+01:00

The estimated allocation base divided by the predetermined overhead rate.

Why don't actual overhead rates be used by most businesses instead of predetermined overhead rates?

The application of predetermined overhead rates can aid in the smoothing of periodic variations (such as seasonal shifts) in the actual overhead costs. Product costs will remain constant throughout the year as a result of this.

Numerator for the predetermined overhead rate:/ Numerator: = Rate

Assessed above costs / Estimated direct materials costs = Rate

1260000 / 1020000 = 124%

What does it mean to charge overhead?

The overhead rate is a cost that goes toward making a product or service. Expenses that are not directly related to production include overhead costs like the cost of the corporate office.

Learn more about overhead rate here:

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