Question

discuss how to calculate and apply a predetermined overhead rate/ (please type out answer)

Answer 1

Predetermined overhead rate or overhead recovery rate is calculated to allot the overheads to cost units. It is calculated on the basis of a selected absorption unit. For example, overhead may be absorbed based on machine hour, no. of workers, etc.

Predetermined overhead rate = Budgeted overhead

                                                    Basis of absorption

Now suppose we know that the overhead rate is $25 per machine hour and the machine hour worked in Department A and B are 1000 Hrs and 1200 Hrs respectively. The overhead to be absorbed will be 25X1000=25000 and 25X1200=30000 respectively.

Absorption is needed for proper allotment of overhead to cost units.

Predetermined overhead rate is applied to obtain the overhead expense to be absorbed. This will help in calculating the under or over absorption of overhead when we have the actual overhead expense incurred.

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