Question

LO 4.4How is the predetermined overhead rate applied?

Answer 1

Answer:

Please see explanation.

Explanation:

Once the factory overhead rate is determined using the estimated amount of factory overhead and estimated  base, it is used to charge overhead cost to the jobs, products or work performed.

Since, not all overhead costs are known at the time of making the product, (such as electricity bill is received after  the month end) therefore, the estimated rate is used to apply the overhead cost to the job or product using actual  activity level. This is called absorption or application of overheads to the products / jobs.

Due to this, at each period end, the management calculates and compares the actual overhead cost with the  applied overhead cost and determine the over or under applied overheads.