Which of the following correctly describes the predetermined manufacturing overhead rate?

Question

BlackTom AI · Accepted Answer

Predetermined manufacturing overhead rate allocates estimated overhead to production based on a chosen activity base.

1) Relevant knowledge points and concepts
- Manufacturing overhead = indirect costs (indirect materials, indirect labor, utilities, depreciation, factory supplies) that cannot be traced directly to specific units.
- Predetermined overhead rate (POHR) is computed before the period begins using estimates: POHR = Estimated total manufacturing overhead / Estimated total amount of the allocation base (e.g., direct labor hours, machine hours, direct labor cost).
- POHR is used to assign overhead to products throughout the period, providing timely unit costs for pricing and inventory valuation.

2) Step-by-step reasoning
- Companies need a consistent way to apply overhead to products during production rather than waiting for actual overhead at period end.
- Therefore they estimate overhead and the allocation base, compute the POHR, then multiply POHR by actual consumption of the base to allocate overhead.

3) Calculation example with intermediate steps
- Suppose estimated manufacturing overhead = $200,000 and estimated machine hours = 10,000 hours.
- Compute POHR: POHR = $200,000 / 10,000 hours = $20.00 per machine hour.
- If a job uses 150 machine hours, allocated overhead = 150 hours × $20.00/hour = $3,000.

4) Why the correct answer is correct
- The POHR is specifically defined to allocate (apply) overhead to production based on an estimated rate; that matches “The rate used to allocate overhead to production.” It is not a measure of actual daily costs or a percentage increase metric.

5) Why other options are incorrect
- “The rate of increase in factory costs”: POHR is not a growth rate; it’s an allocation rate.
- “The rate for factory electricity and gas costs”: electricity/gas are components of overhead, but POHR covers total overhead allocation, not just utilities.
- “The rate of actual overhead costs per day”: POHR is based on estimates before the period, not actual daily overhead.

6) Conclusion
This confirms the correct option: “The rate used to allocate overhead to production,” which matches the provided answer.

Which of the following correctly describes the predetermined manufacturing overhead rate?Single choice

Similar Questions

PA 2 - What is the predetermined overhead rate if direct labor hours are considered the cost driver?

EA 7 - What was the predetermined overhead rate using direct labor hours?

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