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Learn more about Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below. Recommended textbooks for you  FINANCIAL ACCOUNTING ISBN:9781259964947 Author:Libby Publisher:MCG Accounting ISBN:9781337272094 Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E. Publisher:Cengage Learning, Accounting Information Systems ISBN:9781337619202 Author:Hall, James A. Publisher:Cengage Learning, Horngren's Cost Accounting: A Managerial Emphasis... ISBN:9780134475585 Author:Srikant M. Datar, Madhav V. Rajan Publisher:PEARSON Intermediate Accounting ISBN:9781259722660 Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas Publisher:McGraw-Hill Education Financial and Managerial Accounting ISBN:9781259726705 Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles Publisher:McGraw-Hill Education FINANCIAL ACCOUNTING ISBN:9781259964947 Author:Libby Publisher:MCG Accounting ISBN:9781337272094 Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E. Publisher:Cengage Learning, Accounting Information Systems ISBN:9781337619202 Author:Hall, James A. Publisher:Cengage Learning, Horngren's Cost Accounting: A Managerial Emphasis... ISBN:9780134475585 Author:Srikant M. Datar, Madhav V. Rajan Publisher:PEARSON Intermediate Accounting ISBN:9781259722660 Author:J. David Spiceland, Mark W. Nelson, Wayne M Thomas Publisher:McGraw-Hill Education Financial and Managerial Accounting ISBN:9781259726705 Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles Publisher:McGraw-Hill Education What is a Predetermined Overhead Rate?A predetermined overhead rate is an allocation rate that is used to apply the estimated cost of manufacturing overhead to cost objects for a specific reporting period. This rate is frequently used to assist in closing the books more quickly, since it avoids the compilation of actual manufacturing overhead costs as part of the period-end closing process. However, the difference between the actual and estimated amounts of overhead must be reconciled at least at the end of each fiscal year. Larger organizations may employ a different predetermined overhead rate in each production department, which tends to improve the accuracy of overhead application by employing a higher level of precision. However, the use of multiple predetermined overhead rates also increases the amount of required accounting labor. How to Calculate a Predetermined Overhead RateThe predetermined rate is derived using the following calculation: Estimated amount of manufacturing overhead to be incurred in the period ÷ Estimated allocation base for the period A number of possible allocation bases are available for the denominator, such as direct labor hours, direct labor dollars, and machine hours. Example of a Predetermined Overhead RateThe controller of the Gertrude Radio Company wants to develop a predetermined overhead rate, which she can use to apply overhead more quickly in each reporting period, thereby allowing for a faster closing process. For this calculation, she uses the average manufacturing overhead cost for the past three months, and divides by the estimated amount of machine hours to be used in the current month, based on the most recent production schedule for the period. This results in $50,000 being allocated to inventory in the period. A later analysis reveals that the actual amount that should have been assigned to inventory is $48,000, so the $2,000 difference is charged to the cost of goods sold. Problems with Predetermined Overhead RatesThere are several concerns with using a predetermined overhead rate, which include are noted below. Overhead Rate is Not RealisticSince both the numerator and denominator of the calculation are comprised of estimates, it is possible that the result will not bear much resemblance to the actual overhead rate. Sales and Production Decisions are FaultyIf sales and production decisions are being made based in part on the predetermined overhead rate, and the rate is inaccurate, then so too will be the decisions. Variance Recognition ProblemsThe difference between the actual and predetermined amounts of overhead could be charged to expense in the current period, which may create a material change in the amount of profit and inventory asset reported. Weak Link to Historical CostsThe use of historical information to derive the amount of manufacturing overhead may not apply if there is a sudden spike or decline in these costs. What is the purpose of using a predetermined overhead rate?An overhead rate, or predetermined overhead rate, is an equation that allocates a certain amount of manufacturing overhead to each direct labor or machine hour. This rate helps businesses allocate resources and set pricing.
What are the two components of a predetermined overhead rate?You can calculate predetermined overhead rate by dividing the manufacturing overhead cost by the activity driver. For example, if the activity driver was machine-hours, then you would divide overhead costs by the estimated number of machine hours.
Which of the following is the correct formula to compute the predetermined overhead rate?Answer and Explanation: A predetermined overhead rate is an overhead rate that is estimated by the company at the start of the operating period. Hence, it is computed by dividing the estimated manufacturing overhead cost by the estimated total units of allocation based.
What are the 4 steps to calculate the multiple predetermined overhead rate?Predetermined Overhead Rate Calculation (Step by Step). Gather total overhead variables and the total amount spent on the same.. Find out a relationship of cost with the allocation base, which could be labor hours or units, and further, it should be continuous.. Determine one allocation base for the department in question.. |
Which of the following is false pertaining to the use of a predetermined overhead rate
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