Question

At the beginning of a year, a company predicts total direct materials costs of $900,000 and total overhead costs of $1,170,000. If the company uses direct materials costs as its activity base to allocate overhead, what is the predetermined overhead rate it should use during the year?

Answer 1

Answer:

1.30

Explanation:

The cost of production is usually split into direct and indirect cost or overheads. the overheads is usually stated as a function of the direct cost( labour, machine hours, materials etc.)

The predetermined overhead rate

= $1,170,000/$900,000

= 1.3

This means that the company will incur an overhead cost of $1.30 for every $1 spent on direct materials.