Question

Moving to the next question prevents changes to this answer. Question 7 The budgeted indirect-cost rate for each cost pool is computed as budgeted annual indirect costs divided by budgeted annual quantity of cost allocation base budgeted annual quantity of cost allocation base divided by budgeted annual indirect costs actual annual indirect costs divided by budgeted annual quantity of cost allocation base budgeted annual indirect costs divided by budgeted actual quantity of cost allocation base Moving to the next question prevents changes to this answer.

Answer 1

  The budgeted indirect cost rate for each cost pool is computed as :

Answer : Part a) Budgeted annual indirect costs divided by budgeted annual quantity of cost allocation base.

Explanation for the answer : Just for concept clarity, not part of the answer

The budgeted indirect cost rate calculation formula is as follows :

= budgeted annual indirect costs / the budgeted annual quantity of the cost allocation base

Definition: Budgeted indirect-cost rate is an estimated method to allocate expenses to units in a production batch or cost pool. In other words, it’s way for management to assign costs to units that are produced in pools on a budgetary basis.

The budgeted indirect cost rate formula is calculated by dividing the budgeted annual indirect costs by the budgeted annual quantity of the cost allocation base. This is a mouthful, but it’s pretty simple. Basically, it’s dividing the indirect costs of producing the pool by the number of units in the allocation base, so we can assign a cost to each unit.

For example, if the company spent $500 on indirect costs for a pool of 500, $1 of indirect costs would be allocated to each unit. This formula works for any type of indirect expense like overhead or labor.

During the budgeting process, management can estimate the amount of overhead, labor hours, and other indirect expenses that will be incurred to manufacture the products during the period. These budgeted numbers are then allocated to the number of units to be produced during the period with the cost rate. This way management can predict what their manufactured cost of goods will be at different levels of production and make a finalized plan for the upcoming period.

This concept carries over to the normal costing system that traces direct costs to a cost object by using the actual direct cost rates.