alleryStart learning →How is a predetermined factory overhead rate calculated?
AEstimated overhead divided by estimated hours
BActual overhead divided by actual hours worked
CEstimated overhead divided by units sold
DActual overhead divided by estimated hours
Answer & Solution
Correct answer: A. Estimated overhead divided by estimated hours
1. Actual factory overhead is not known while jobs are in production, because bills for the period are still outstanding.
2. Managers need timely job costs, so overhead is estimated at the time it is applied.
3. The predetermined rate is estimated total factory overhead costs divided by the estimated number of hours in the activity base.
4. Any version built on actual overhead would defeat the purpose, since that figure arrives too late.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 2.1 Introduction_
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